Air Thread

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A. How should the Cash Flows be valued for 2008-2012?
The calculation of each cash flow required us to use the projections from AirThread Connections that are given in the Exhibit 1 of the case allowing us to know the Total Revenue, EBITDA, EBIT and the Unlevered Net Income to be able to compute the Unleveraged Cash Flow (UFCF) from 2008-2012. As well we used Depreciation & Amortization, Capital Expenditures and the assumptions established in AirThread Connections Exhibit 1 case to make the adjustments that Working Capital needed to fully calculate the Unleveraged Cash Flows from 2008 – 2012. Revenue Projections|  | 2008 | 2009 | 2010 | 2011 | 2012 | Service Revenue| | 4,194.33 | 4,781.54 | 5,379.23 | 5,917.15 | 6,331.35 | Equipment Sales| | 314.77 | 358.84 | 403.70 | 444.07 | 475.15 | Total Revenue| | 4,509.10 | 5,140.38 | 5,782.93 | 6,361.22 | 6,806.50 | |

System Operating Expenses| 838.87 | 956.31 | 1,075.85 | 1,183.43 | 1,266.27 | Cost of Equipment Sold| | 755.46 | 861.22 | 968.87 | 1,065.76 | 1,140.36 | Selling, General & Administrative| 1,803.64 | 2,056.15 | 2,313.17 | 2,544.49 | 2,722.60 | EBITDA| | 1,111.14 | 1,266.70 | 1,425.04 | 1,567.54 | 1,677.27 | Depreciation & Amortization| 705.23 | 803.96 | 867.44 | 922.38 | 952.91 | EBIT| | 405.91 | 462.74 | 557.60 | 645.16 | 724.36 | Tax Rate| | 162.36 | 185.10 | 223.04 | 258.07 | 289.74 | Net Operating Profit After Tax| 243.55 | 277.64 | 334.56 | 387.10 | 434.62 | | | | | | | |

| | | | | | |
Working Capital| 2007| 2008| 2009| 2010| 2011| 2012| Accounts Receivable| 435.5 | 521.90| 595.00| 669.40| 736.30| 787.90| Days Sales Equip. Rev.| 101.0 | 135.00| 153.90| 173.10| 190.40| 203.70| Prepaid Expenses| 41.6 | 46.90| 53.50| 60.10| 66.20| 70.80| Accounts Payable| 143.4 | 163.20| 186.10| 209.30| 230.30| 246.40| Deferred Serv. Revenue| 260.8 | 335.50| 382.40| 430.20| 473.20| 506.40| Accrued Liabilities| 59.2 | 64.70| 73.70| 82.90| 91.20| 97.60| Net Working Capital| 114.6 | 140.40| 160.10| 180.10| 198.10| 212.00| Change Net Working Capital| 25.80| 19.70| 20.00| 18.00| 13.90| | | | | | | |

Capital Expenditures| | 631.27| 719.65| 867.44| 970.09| 1055.01| | | | | | | |
Unlevered Cash Flow|  | 291.62| 342.28| 314.54| 321.37| 318.64|

B. How should the terminal value be estimated?
Terminal Value is nothing more than the present values of the projections made, we have to use our discount rate obtained from WACC, considering that AirThread Connections Cost of Capital structure debt to value and debt to equity ratios is not 0 and that has a similar ratio to that of the industry.

Projections|  | 2008| 2009| 2010| 2011| 2012|
Unleveraged Cash Flow| | 291.62| 342.28| 314.54| 321.37| 318.64| PV of Cash Flows| | 277.38| 309.67| 270.67| 263.05| 248.08| Total Value of Un-Levered Cash Flows| | 1,368.86| | | | |

C. How should one deal with the non-operating assets in equity affiliates be accounted for in the valuation? Non-operating assets, in this case non-operating assets are meant to be added to operating assets of AirThread Connections, and then we will obtain our final projection of the company’s value without synergy. For this we calculate the industry Price-to-Earnings Ratio (P/E) and the industry EBIT from information provided in Exhibit 7. Average Industry P/E|

EBIT| 5,531.60 |
P/E| 13.1926 |

The non-operating assets are usually disclosed in the Investing and Financing Activities, under Exhibit 4 AirThread Income Statement we can appreciate that Equity in Earnings of Affiliates is the investment in other companies not related to the company’s operating duties.

Non-Operating Assets = 90 x 13.1926= 1,187.3
2. What...
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