Question # 01:
For valuing the acquiring company, there are two ways which might help American Cable Communication Company in having an accurate valuation of the Air Thread Company.Usually, the results are extracted from the calculation of both, weighted average cost of capital (WACC) and adjusted present value (APV). However, the adjusted present value is mostly used by the companies for the calculation of the cash flows.
On the other hand, for discounting the unlevered cash flows, the WACC is commonly used. Unlevered cash flows are defined as the money that the companies already have before paying off all their financial obligations. The cost of equity and after tax cost of debt are fundamental elements of the WACC. The method for valuation of company is WACC. The cash flows are evaluated on the basis of the revenues gained through servicing as it is shown in the exhibits that the service revenues are increasing or arein increasing trends. In the fiscal year 2008, the service revenues were 4.2 billion dollars and they have increased in 2012, reaching to 6.33 billion dollars. The capitalstructure is also taken into consideration as it has major importance, in 2008 it was 631 million dollars while inthe fiscal year 2012, it was increased to 1055 million dollars.
Subsequently, the revenues based on the equipment have reflected increasing trend starting from the fiscal year 2008 and ended in 2012. It has been increasingly at a growth rate of 7.5%, while on the other hand, IT has also been increased in 2008 from 314 million dollars to 475 million dollars in 2012. Thus, the total revenues generated in 2008 are 4509 million dollars, which have been increased to 6807 million dollars in 2012. Apart from this, the equipment cost is also deducted from the revenues and in 2008, the cost of equipment was 755 million while in 2012, it was increased to 1140 million dollars.
Furthermore, the system operating expenses have also been deducted from the net revenues, having a value of about 839 million dollars in 2008 while in the very few next years, it has become 1266 million dollars in the fiscal year 2012. In addition to this, the selling, general and administrative expenses were also withheld and as a result, the value based on the EBIT was obtained. In 2008, the value related to the EBITDA was 1111 million dollars, which was significantly increased to 1677 million dollars in 2012. Moreover, the amount of amortization and depreciation was also deducted from EBITDA.
Question # 02:
Over the forecasted period, estimating terminal value from 2008 to 2012, the value of the cash flows of the company after the last year forecast period, is obtained. If this value is discounted back to today, it may refer to the terminal value. If value of the long term future cash flows of the company is not included, it means that the company has not been operating at the end of the year 2012. Hence, the terminal value method is used in order to make several assumptions regardingthe growth of the long term future cash flows.
Horizon value is a synonym of terminal value, which can be calculated by looking at the future cash flows of the specific company.The future cash flow ranges from 2008 to 2012 in case of Air Thread……………….
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