Valuation of Air Thread Connections Case Solution
Furthermore, the selling, general and administrative expenses have been deducted and as a result, the value based upon the earnings before interest and tax has been obtained.
The value related to EBITDA is $1,111 million in 2008 however it has increased to $1,677 million in the fiscal year 2012. On the other hand, the amount of depreciation and amortization has also been deducted from the earnings before interest and tax before depreciation and amortization.
Hence, after the deduction of depreciation and amortization, the EBIT has been obtained and the tax rate that has been used in order to evaluate the after-tax cash flows is almost 40% as per the exhibits. Therefore, by taking account of the income tax expense, the operating after-tax cash flows have been obtained which are amounting to 291 million dollars in the fiscal year 2008 and in the fiscal year 2012 the free cash flows after tax is 318.6 million dollars. (See Exhibit 1)
Horizon value is also called a terminal value, it is estimated by looking the future free cash flows of the company. As in the case of AirThread, the future free cash flows are from 2008 to 2012.
Horizon value will be estimated through the free cash flows of thefiscal year 2012,by looking at the cost of capital (WACC) and terminal growth or we can say that long-term growth rate.
It is mentioned in the case that long-term growth rate could not exceed the growth rate of macro economy as a whole.
What should discount rate be used for un levered FCF for 2008 through 2012? Is it the same discount rate that should be used to value the horizon value? Why or why not?
The discount rate of 5.1% can be used to discount the free cash flows and this discount rate will also be used to find the amount of Horizon value.
The discount rate is calculated by looking at the different factors. Such as debt to assets proportion, risk-free rate, market risk premium, cost of debt, beta equity and tax rate.
The portion of thedebt is calculated by looking at the balance sheet of the company for the fiscal year 2007, the portion of thedebt to theasset is 32% and the remaining 68% is the portion of equity.
On the other hand, the market risk premium used in the calculation of WACC is 5.00% as it is mentioned in the case. The equity beta that has been used is 1.00, it is the industry average, we have calculated the average of equity beta of its competitors, and as a result, the value related to the cost of equity is almost 9.02% and the cost of debt after-tax is 3.3% and the tax rate that has been used in order to calculate the cost of debt is almost 40%, mentioned in the case. Hence, the resulting weighted average cost of capital is 5.1%.
Develop an estimate of the long-term growth rate that should be used to estimate Air Thread’s horizon value.
As per the exhibits, the long term growth rate that has been used in order to calculate the terminal value is considered to be 3%. Moreover, by making use of the estimated long-term growth rate that has been used for the calculation of the terminal value the present value of Air Thread’s going concern for the fiscal year 2012 is 15,290 million dollars. Furthermore, the terminal value has been calculated by multiplying the operating after-tax cash flows with the long-term growth rate of 3% and then dividing it by the difference between the weighted average cost of capital and the growth rate. (See Exhibit 3)
What is the total value of Air Thread before considering any synergies?
The enterprise value of Air Thread that has been calculated for Air thread before taking account of the synergies is $18,520 million as per the exhibits in the fiscal year 2012.
Thus, both companies could work as a synergy if merged together or acquired by the American Cables Communication. The synergy could benefit both the individual companies to earn more benefits and rewards from growing larger in size and enjoying the business market collaborating with each other.
This high probability of generating revenues and profits consistently has reduced the overall risks for American Cables associated with the industry. Apart from this, the ability to grow in size would enable both the companies to achieve the perks of economies of scale; hence, reducing the overall costs and improving the efficiency of the companies by efficient utilization of resources.
The acquisition of Air Thread by American Cables would add significant value to Air Thread’s activities as a whole. Air Thread was failing to attain competitive advantage over its competitors pertaining to wireless networking system…………………….
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution