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Treat this as the first page of your assignment

Course Name:

CORPORATE FINANCE

Assignment Title:

CASE 3 Valuation of AirThread Connections

Submitted by:

GROUP G15

Group Member Name

Aditi Mittal
Jyotsna Mahara
Sahil Dhar Hakim
Sumit Pokhriyal
Vishal Lahoti

PG ID
61310666
61310500
61310491
61310475
61310231

(Let us not waste paper, please continue writing your assignment from below)

SOLUTION
Assumptions taken for calculations :
1) While calculating unlevered for comparables, we assumed the debt to be a post-tax value.
2) Comparable companies revenues are lower than AirThread so it seems better to take the average of all
the companies Beta.
3) D/E ratio is changing year to year so it is better to evaluate the firm using APV.
We have used below mentioned figures while calculating unlevered cost of equity
i. Marginal Tax Rate

40%

ii. Debt Beta

0.00(assuming debt at market risk free)

iii. Market Risk Premium

5.00%

iv. Risk Free Rate

4.25%

v. Cost of debt

5.5%
1

Study-Group G15

4) for the calculation of terminal value, we can take the long term growth rate of free cash flows at 3%
which is a growth rate of a developed economy.
5) Cash flows can be calculated by EBIT(1-Tax%) + Depreciation Net Working capital. Since, we are
using APV so this FCF needs to be discounted using unlevered equity cost of capital. For discounting
terminal value, we are using WACC assuming that after 5 years, AirThread leverage ratio will be constant
and in line with those of industry.
6) We are counting PV of equity affiliates by multiplying it with industry average P/E.

Comparable Companies:

Universal Mobile
Neuberger Wireless
Agile Connections
Big Country Communications
Rocky Mountain Wireless
Average

Debt/
Value
0.00%

Equity

Net

Debt/

Debt/

Equity

Market Value

Debt

Value

Equity

Beta

48.0%
29.3%
19.4%
24.1%
30.7%
30.3%

92.3%
41.4%
24.1%
31.7%
44.4%
46.8%

65,173
94,735
37,942
47,314
5,299
50,093

Debt/
Equity
9.00%

Asset
Beta
0.76

60,160
27,757
9,144
15,003
2,353
22,883

Revenue

0.86 43,822
0.89 42,684
1.17 34,698
0.97 38,896
1.13
4,064
1.00 164,164

EBIT

11,795
7,020
1,631
6,702
510
5,532

Net

(Asset)

Income

Unlevered

EBITDA

16,949 3,794
14,099 4,103
9,914 (30)
12,614 3,384
1,028 240

0.45
0.63
0.94
0.74
0.78

Weightage

Weighted Beta

1.00
1.00
1.00
1.00
1.00
5.00
Unlevered
Beta
Average P/E

0.45
0.63
0.94
0.74
0.78
3.54
0.71
13.19

Equity Cost of Cost of

Beta Equity Debt Unlevered Cost of Capital
0.70 7.74% 5.50%
7.37%

Unlevered Cost of Capital = 7.37%

Since D/E ratio is changing every year, APV is a better method for doing the valuation of the company.
By using Exhibit 1 given in the case, the net capital workflows of AirThread without synergy for the
given projection years are calculated as shown below :
Working Capital Assumptions
Accounts Receivable
Days sales equip rev.
prepaid expenses
Accounts Payable
Deferred Serv. Revenue
Accrued Liabilities
Net Working Capital
Increase in NWC

2007
435.5
101.0
41.6
260.8
143.4
59.2
114.6
0

2008
521.93
134.97
46.89
335.45
132.24
64.66
171.4
56.8

2009
595.00
153.86
53.46
382.42
150.75
73.71
195.4
24.0

2010
669.37
173.10
60.14
430.22
169.59
82.92
219.9
24.4

2011
736.31
190.41
66.15
473.24
186.55
91.21
241.9
22.0

2012
787.85
203.73
70.78
506.37
199.61
97.60
258.8
16.9

We also need to reduce the effect of the interest payment, i.e the tax shield from the FCF in order to get
the unlevered FCF of AirThread. Below is the table for the interest payment calculation arrived from Debt
Repayment Schedule given in the case.

2
Study-Group G15

2008
2009
2010
2011
Interest Expense per Annum ($mn)
199.43
183.08 165.80 147.55
Principal payment per Annum
289.92
306.28 323.55 341.80
After-Tax Interest Expense per Annum
119.66
109.85
99.48
88.53

Tax Shield
PV of Tax Shield

2008
79.77
75.61

2009
73.23
65.79

2012
128.27
2,495.99
76.96

2010
66.32
56.48

2011
59.02
47.64

2012
51.31
39.26

Total PV of Tax Shield is $ 284.78

FCF and Cash estimation of AirThread without counting the synergy is given below. Note that at end of
2012, company is short of cash.
This is because of reduction in margin and increase in operating cost because of stiff competition in
industry

Operating Results:
Service Revenue
Plus: Equipment Sales
Plus: Synergy Related Business Revenue
Total Revenue
Less: System Operating Expenses
Plus: Backhaul Synergy Savings
Less: Cost of Equipment Sold
Less: Selling, General & Administrative
EBITDA
Less: Depreciation & Amortization
EBIT
Tax Rate
Earnings After taxes
Un-Levered Free Cash Flow
Present Value of FCF

Excess Cash:
Less: After-Tax Interest Expenses
Less: Scheduled Principal Payments
Excess Cash

Cash on Balance Sheet

2008

2009

2010

2011

2012

4,194.33
314.77
0.00
4,509.10
838.87
0.00
755.46
1,803.64
1,111.14
705.23
405.91
40%
243.55
260.65
242.76

4,781.54
358.84
0.00
5,140.38
956.31
0.00
861.22
2,056.15
1,266.70
803.96
462.74
40%
277.64
337.90
293.11

5,379.23
403.70
0.00
5,782.93
1,075.85
0.00
968.87
2,313.17
1,425.04
867.44
557.60
40%
334.56
310.17
250.58

5,917.15
444.07
0.00
6,361.22
1,183.43
0.00
1,065.76
2,544.49
1,567.54
922.38
645.16
40%
387.10
317.39
238.81

6,331.35
475.15
0.00
6,806.50
1,266.27
0.00
1,140.36
2,722.60
1,677.27
952.91
724.36
40%
434.62
315.60
221.17

2008
(119.7)
(289.9)
(148.9)

2009
(109.8)
(306.3)
(78.2)

2010
(99.5)
(323.6)
(112.9)

2011
(88.5)
(341.8)
(112.9)

2012
(77.0)
(2,496.0)
(2,257.4)

55.57

(22.6)

(135.5)

(248.5)

(2,505.8)

3
Study-Group G15

APV value of AirThread should be the summation of PV(FCF) + PV(Interest Shield) + PV(Non
Operating asset) + PV(Terminal Value)

2008
2009
2010
2011
2012
242.76 293.11 250.58 238.81 221.17
79.8
73.2
66.3
59.0
51.3
75.6
65.8
56.5
47.6
39.3
3% Taking long term economy growth rate
7438.62
5212.89
90 from exhibit 4
1187.33
7,931.43

NPV Calculation
Present Value of FCF
Interest Tax Shields
PV of Interest Tax Shields
Terminal Value Growth rate
TV at end of 2012
PV of Terminal Value
Equity in earnings of Affiliates
Value of affliates
NPV of the Airthread

NPV of Airthread without synergy is $7931.43mm

Without the synergy, AirThread valuation seems cheaper but free cash flow of the company is
decreasing year on year which suggests that AirThread needs ACC in order to benefit from reduction in
operating costs and increase in market share. In order to find the benefit of two companies merger, we
need to analyse the net benefit of the synergies between two companies.

Valuation With synergy taking into account

Revenue and cost benefits can be calculated from Table 4 and 5 of the case.
Wireless Business Subscribers:
Average Monthly Subscribers (in MM's)
Average Monthly Minutes
Total Monthly Minutes
Revenue Per Minute
Annual Business Revenue Increase
Backhaul Savings:
System Operating Expenses
Backhaul Percentage
Estimated Backhaul Costs
Reduction in Backhaul Costs
Backhaul Savings

2008
0.30
859
258
0.0506
156.5

838.9
20.0%
167.8
0.0%
0.0

2009
0.50
885
442
0.0506
268.6

2010
0.70
911
638
0.0506
387.3

From Table 4
956.3
1,075.8
20.0%
20.0%
191.3
215.2
7.0%
12.0%
13.4
25.8

2011
1.00
939
939
0.0506
569.9

2012
1.20
967
1,160
0.0506
704.5

1,183.4
20.0%
236.7
22.2%
52.5

1,266.3
20.0%
253.3
30.0%
76.0

4
Study-Group G15

In terms of synergy, the above savings and increase in revenue will modify working capital by changing
account receivable, inventory etc. The revised calculation is given below:-

Working Capital Assumptions

Accounts Receivable
Days sales equip rev.
prepaid expenses
Accounts Payable
Deferred Serv. Revenue
Accrued Liabilities
Net Working Capital
Increase in NWC

2007
435.5
101.0
41.6
260.8
143.4
59.2
114.6
0

2008
540.04
134.97
47.76
341.63
134.67
65.85
180.6
66.0

2009
626.09
153.86
54.75
391.70
154.41
75.50
213.1
32.5

2010
714.21
173.10
61.92
442.97
174.62
85.38
246.3
33.2

2011
802.28
190.41
68.57
490.56
193.38
94.55
282.8
36.5

2012
869.39
203.73
73.62
526.69
207.62
101.51
310.9
28.2

The APV of the AirThread with synergy is given below. Due to increase in revenues and decrease in
operating cost, there is a significant increase of worth of Airthread as shown below:-

NPV Calculation
Present Value of FCF
Interest Tax Shields
PV of Interest Tax Shields
Terminal Value Growth rate
TV at end of 2012
PV of Terminal Value
Equity in earnings of Affiliates
Value of equity affliates
NPV of the Airthread

2008
2009
2010
2011
2012
295.80
391.17
387.47
430.87
450.61
79.77
73.23
66.32
59.02
51.31
75.61
65.79
56.48
47.64
39.26
3% Taking long term economy growth rate
15155.7
10620.93
90 from exhibit 4
1187.331
14048.97

NPV of Airthread with synergy is $14048.97mm

Conclusion
We can see that NPV of Airthread with synergy is much higher than without synergy which leads to the
conclusion that if both companies tie-up then there is a huge potential of upright revenue and hence
increase in market capitalization.
Please refer the Table 1 for cash estimation taking synergy into account.

5
Study-Group G15

Taking the above synergy in account, the estimated FCF and Cash in Balance sheet is as below:Table1
2008
Operating Results:
Service Revenue
Plus: Equipment Sales
Plus: Synergy Related Business Revenue
Total Revenue
Less: System Operating Expenses
Plus: Backhaul Synergy Savings
Less: Cost of Equipment Sold
Less: Selling, General & Administrative
EBITDA
Less: Depreciation & Amortization
EBIT
Less: Interest Expense

2009

2010

2011

2012

4,194.33 4,781.54 5,379.23 5,917.15

6,331.35
314.77
358.84
403.70
444.07
475.15
156.48
268.62
387.34
569.95
704.46
4,665.58 5,408.99 6,170.27 6,931.17
7,510.96
838.87
956.31 1,075.85 1,183.43
1,266.27
0.00 $ (13.39) $ (25.82) $ (52.54) $ (75.98)
755.46
861.22
968.87 1,065.76
1,140.36
1,866.23 2,163.60 2,468.11 2,772.47
3,004.38
1,205.03 1,441.26 1,683.26 1,962.06
2,175.92
729.70
845.97
925.54 1,005.02
1,051.53
475.32
595.28
757.72
957.04
1,124.39
199.4
183.1
165.8
147.5
128.3

Earning before taxes

Tax Rate
Net Income
Un-Levered Free Cash Flow
Present Value of FCF

275.9
40%
165.54
317.6
295.80

412.2
40%
247.33
451.0
391.17

591.9
40%
355.16
479.6
387.47

809.5
40%
485.69
572.6
430.87

996.1
40%
597.67
643.0
450.61

Excess Cash:
Less: After-Tax Interest Expenses
Less: Scheduled Principal Payments
Excess Cash

2008
(119.7)
(289.9)
(92.0)

2009
(109.8)
(306.3)
34.8

2010
(99.5)
(323.6)
56.6

2011
(88.5)
(341.8)
142.3

2012
(77.0)
(2,496.0)
(1,929.9)

Cash on Balance Sheet

112.52

34.84

56.58

142.30

(1,929.95)

6
Study-Group G15