Valuation of cash flows in the relevant period

Estimating terminal value

A. Procedure

1. The cash flows (without synergy) were taken as provided for 5 years along with adjustment for Net working capital changes.

2. WACC was calculated for various D/V ratios

3. Terminal Value of the firm was determined using P/E Multiple of 19.1

4. Valuation done for the cash flows and terminal value at a discount rate corresponding to industry average D/V Ratio

5. APV determined using the unlevered equity discount rate and the debt rate. Interest tax shield considered accordingly

6. Steps 1-5 repeated for firm with synergy and value determined.

Key Issues that have been faced are the following

a. Valuations of Cash flows

1. Determining the correct discount rate.

2. Accepting that all receivables will be converted to cash in the future

3. D/V Ratio taken at industry average

4. Free cash flows computed for 5 years

5. Interest tax shield (APV) discounted at 5.5% (Rd)

b. Terminal Value

1. Terminal Value taken using P/E multiple of 19.1 for earnings of year 2012

2. Discounted at WACC to get value at end of 2007

Q.2 Compute the cost of capital / discount rates that are relevant for this exercise

A.

Discount Rate

Rate

ReUnl

8.33%

Rd

5.5%

WACC @ 28.1% D/V

8.061%

Q3. What is the value of AirThread Connections – before and after accounting for any synergies.

A.

Method

Without Synergy

With Synergy

Discounted Cash flow

$ 6,898 Million

$ 13,917 Million

APV

$ 7,215 Million

$ 14,185 Million