Paper, Order, or Assignment Requirements

It requires justification and documentation of all major assumptions in order to come up with valuations and recommendations. All spreadsheet analysis MUST BE INCLUDED.

The case that you are asked to analyze is “Valuation of AirThread Connections” (HBS case #4263) Please email me any Excel spreadsheets you create. Such sheets should be well labeled and sufficiently formatted so that I can follow them.

For this case, please answer the following questions (and justify/document all major assumptions):

1) (20 points) Using the comparable companies provided in Exhibit 7, what is the cost of (WACC) for AirThread?

2) (20 points) Using the projections provided in the case (Exhibit 1), project unlevered Free Cash Flows for AirThread as a stand-alone company?

3) (20 points) What is the stand-alone value of AirThread? Show, and justify, your valuation model.

4) (30 points) Given the projected synergies and financing method, what is the enterprise value of AirThread as merger target? Show, and justify, your valuation model.

5) (10 points) Based on your analysis, do you recommend that ACC purchase AirThread?

Please see next page for (hopefully) helpful hints:

Hints:
The numbers below correspond to the questions on the prior page:

1) See the slides in our valuation section about using unlevered betas (class 3; slide 21), and use the industry average as Airthread’s capital structure (since its capital structure in the case is potentially very unsettled)

2) In Exhibit 1, the projections for Working Capital Assumptions (Accounts Receivable, Days Sales Equip. Rev, Deferred Serv. Revenue, Accounts Payable, and Accrued Liabilities) are estimated based on number of days on a 360-day year basis. For example, Accounts Receivable 41.67X means on average it it takes 41.67 days to receive payment from customers. So every year accounts receivable will be 41.67/360 * total revenue. Similarly, for accounts payable it takes 35.54 days on average to pay the firm’s bills: so accounts payable equals 35.54/360*(SGA + operating expenses). Also, the firm on average keeps inventories equal to 154.36 days of equipment revenue. Prepaid expenses are estimated as a percent of all Operating Expenses (apart from Depreciation and, obviously, tax)

3) On a stand-alone basis, you can use the WACC (from question 1) as the discount rate since the firm’s leverage is not dramatically changing. Non-operating assets are a substantial part of Air Thread’s value, but it will not be reflected in the stand-alone free cash flows from question 2. Use multiples to estimate the value of non-operating assets: the earnings from such assets are on AirThread’s income statement under the heading “Equity in Earnings of Affiliates,” and you can estimate an appropriate multiple using the comps in Exhibit 7.

4) Think carefully about what valuation model should be used to value AirThread, given the characteristics of the expected cash flows after the merger. In particular, notice that ACC wants to approach acquisitions using an LBO-Type framework, and see the slides in our valuation section about the APV approach to valuation (in class 3 and class 8). In question 1 you should have already developed enough elements to estimate the unlevered cost of capital, and interest tax shields can be discounted using the cost of debt. The debt repayment schedule is presented in Exhibit 6. Remember that different valuation models are not mutually exclusive, you can use a different model for different forecasting periods. In particular, you can use APV for the forecast window when the target’s capital structure changes a lot, and WACC when the target’s capital structures become stable in the terminal window.