Appraisal Report of Air Thread Connections free essay sample

Appraisal report of Air Thread connections Jennifer Zhang Robert Zimmerman (Vice President of ACC) New York Business Review, august 2007, volume 3, pp34-89 Appraisal Report ABSTRACT This paper intends to analyze and evaluate the Air Thread Connection (ATC) Company and determine whether the acquisition by the American Cable is acceptable. From the outset, it is observable that, the acquisition would give American Cable access to wireless technology and the wireless spectrum. Thus acquisition offers more competitive service bundles on company’s service delivery. However, the real situation and the anticipated benefits will only be ascertained by insight analysis. MAIN METHODOLOGY ON VALUING ATC APV METHOD: It is imperative to note that, discounted cash flow methodology is applied in valuing Air Thread Connection Company. This is critical in establishing the viability of the anticipated acquisition. This methodology requires use of the projections from Air Thread Connections, which are given in the Exhibit 1. This allows calculation of the total revenue, EBITDA, EBIT and the Unlevered Net Income. We will write a custom essay sample on Appraisal Report of Air Thread Connections or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Furthermore, the depreciation and Amortization, Capital Expenditures and the assumptions projected in Exhibit one case to make the adjustments in working Capital. These will all facilitate calculation of the Unleveraged Cash Flow (UFCF) from 2012 which stable increases. Consider the computations referencing income statement on separate sheet. TERMINAL VALUE Furthermore terminal value as a key valuation factor which can be calculated in two ways namely perpetuity model and market value of comparable companies. The perpetuity model involves use of terminal year free cash flow (FCF), growth of terminal year cash flow over the previous year and WACC with additional debt (COMFORT BRIEGER, 2002). On the other hand, similar company model requires the EBIT and market value to determine the EBIT ratio of similar companies in comparison with that of AirThread Connection. The computation of perpetuity method illustrates as follows. Future cash flows (FCF) times a growth factor g with using Weighted-Average Cost of Capital (WACC=7. 03%) as discount factor, so Terminal value equals FCF*(1+ g)/(WACC-g). In this case the Terminal Value of Perpetual Future Cash Flows is $16. 4147B. For the non-operating assets, assume ATC investments are within wireless communications industry, non-operating assets are added to operating assets of AirThread connections for easy accountability (RUSSEL REEVES, 2006). The valuation of Non-Operating Assets needs information from Air Thread Income Statement shows â€Å"Equity in Earnings of Affiliates† and weight-based P/E ratio for comparable companies referencing the third worksheet. Thus â€Å"Equity in Earnings of Affiliates† equals $90M times P/E Ratio which is 19. 22 obtain the value of Air Thread NonOperating Assets at $1. 730 B INTEREST RATE DETERMINATION The rate used in discounting UFCF due to the macro economy nature or the industry in, which Airthread Connections company operate. Similarly, the rates used in discounting the terminal value correlated with the growth trend of AirThread Connection (CASSEDY, 2004) which is (WACC-g). Finally the rate used in estimating the long-term growth was chosen because it would be the function of the company‘s return on capital and reinvestment rate (GROPPELLI NIKBAKHT, 2000) So all in all, the valuation assignable to Air Thread Connections is the sum of the NPVs of operating cash flows and the terminal value and is shown in Table 6 of the attached worksheet. The valuation is $12,834. 79 million. SYNERGIES CONSIDERED Two significant areas of synergy between American Cable Communications and Air Thread Connections are the savings in backhaul costs for ATC and the additional revenue from wireless business subscribers. The savings in backhaul costs flow directly to the company’s earnings and cash flow. The offering of bundled services results in additional revenues which yield additional earnings after proportionate expenses. The computations are in Table 7 of the attached worksheet. The Net Present Value of the additional cash flows due to these two areas of synergy is comes to $461. million. The valuation of ATC with the effect of synergy rises to $13,296. 39 million or rounded to $13. 30 billion. SENSITIVITY ANALYSIS (Indicates in worksheet â€Å"Sensitivity Analysis† in separate sheet) Private Company Discount: The discount related to illiquidity of private investments which diminishes as revenue of company increases. This discount bounded on lower end by cost of going public equal to 10%. Growth Rate (g): The growth rates which are used in terminal value calculation can have a tremendous effect on terminal value. To illustrate, 1. 5% to 2. 5% ? in growth rate has a $3. 000 B to $7. 000 B effect. Potential Synergy: The increase in revenue from bundled service offerings (BODIE MERTON, 2000) could be higher or lower than expected. To illustrate, a 20% change in revenue has a $1. 000 B effect on Air Thread’s value. RECOMMENDATION AND CONCLUSION Through thoughtful valuation, it is imperative to note that, the Air Thread Connection cash flow tends to increase from the year 2008 to 2012 which indicates the financial stability of the company. Since the stability and its internal systems and policies seem to work effectively, the intended acquisition seems viable. After elaborative analysis, acquisition on Air Thread Connections is obtainable for amount between $8. 162 B and $13. 525 B. Special attention should be given to the projected growth rate of Air Thread Connections, which will have a significant effect on total value of the firm (Ahmed, 2009). Note that, 1% ? in growth rate has 30% net effect on total firm value. References BODIE, Z MERTON, R. C. (2000). Finance. Upper Saddle River, NJ, Prentice Hall. BANKS, E. (2011). Finance. New York, NY, Routledge. AHAMED, L. (2009). Lords of finance: the bankers who broke the world. New York, Penguin Press. GROPPELLI. A. A NIKBAKHT. E (2000). Finance. Hauppauge, N. Y. , Barrons. RUSSELL, J. D. , REEVES, F. W. (2006). Finance. Chicago, Ill, the University of Chicago Press. COMFORT, J. , BRIEGER, N. (2002). Finance. New York, Prentice Hall International JEAN, W. H. (2003). Finance. [New York], Dryden Press. CASSEDY, P. (2004). Finance. San Diego, Calif, Lucent Books