1. Given the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points) * From the statement of AirThread case, we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cash flows or assets of AirThread. * In another word, it’s a highly levered transaction using a fixed WACC discount rate; however the leverage is changing in fact. * If we want to use WACC method, one assumption must be met: this program will not change the debt-equity ratio of AirThread. Under LBO approach, it’s impossible. * So we decide to use APV method to value AirThread. WACC method is not appropriate here, but we still need to calculate the weight average cost of capital (WACC) of AirThread.

Approach to value AirThread before considering any synergy
1. Develop a projection of unlevered free cash flow for AirThread. * Discount AirThread’s unlevered free cash flows at unlevered WACC. 2. Determine the PV of interest tax shield:
* Discount AirThread’s interest tax shield by debt cost of capital (interest rate of debt). 3. Add the unlevered value to the PV of interest tax shield to get the value of the acquisition. 4. Using Dividend Discount Model (Gordon Growth Model) to estimate the terminal value. 5. Estimate the value of operating assets based on the above (without synergies). 6. Add the value of non-operating assets (excess cash, securities, investments) to get a total value of AirThread. 7. Minus the debt value from the total value of ATC to get an equity value of AirThread. 2. What discount rate should Ms. Zhang use for 2008 through 2012? Should she use the same discount rate to value the terminal value? Why or why not? (2 points)

Chart 1
In order to calculate the discount rate:
* We need to get the. We can get...

...budgeting? a Will an investment generate adequate cashflows to promptly recover its cost? b Will an investment generate an acceptable rate of return? c Will an investment have a positive netpresentvalue? d Will an investment have an adverse effect on the environment? 3 Which of the following is not considered when using the payback period to evaluate an investment? a The profitability of the investment over its entire...

...approach, which means that the debt to equity ratio of AirThread will not be the same from 2008 to 2012, so APV approach would be more suitable to valuate the cashflows between 2008 and 2012.
After 2012, AirThread will de-lever to industry norm and thus, they will have a target leverage ratio; therefore WACC is best to estimate the terminal value.
Finally, regarding the valuation of non-operating investments in equity affiliates, due to limited...

...decimal places in your calculations and final answers, and at
least4 decimal places for interest rates;
5) Interest rates are annual unless otherwise stated;
6) Bonds pay semi-annual coupons unless otherwise stated;
7) Bonds have a par value (or face value) of $1,000; and
8) You may use the back of the exam paper as your scrap paper.
Good Luck.
32 Calculation Questions (4 marks each)
1. The common stock of Robin's Tools sells for $24.50. The firm's beta...

...000.
Assuming a company tax rate of 30%, the firm’s cashflow from operations is:
(A)
$840,000
(B)
$180,000
(C)
$135,000
(D)
$75,000
4.
Given an effective annual interest rate of 14 per cent, the presentvalue of a
perpetuity consisting of yearly payments of $25,000 starting immediately is,
rounded to the nearest dollar
(A)
(B)
$203,571
(C)
$178,571
(D)
5.
$232,071
$156,641
If the...

...Freecashflow
In corporate finance, freecashflow (FCF) is cashflow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on.
G. Bennett Stewart - the "economic model of value holds that share prices are determined by just two...

...consider what types and which cashflows should be included in capital budgeting analysis.
D&D was producing and marketing two major product lines:
1. Lift-Off: Low –suds, concentrated powder.
2. Wave: Traditional powder detergent.
Questions & Answers:
1. If you were in Steve Gasper’s place, would you argue to include the cost from market testing as a cash outflow?
If I’m Steven Gasper’s I would not include the cost from market...

...CONSTRUCTION OF FREECASHFLOWS A PEDAGOGICAL NOTE. PART I
Ignacio Vélez-Pareja ivelez@javeriana.edu.co Department of Management Universidad Javeriana Bogotá, Colombia Working Paper N 5
First version: 5-Nov-99 This version: January 2001
This paper can be downloaded from the
Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=196588...

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