AirThreads

AirThreads

Write a report covering all the topics and calculation questions in the file (QsValuationof AirThread). exhibits and source are from file (Valuation if AirThreads connections).
Valuation of AirThread Connection
Topics to Cover:
1. Explain why the APV methodological approach should be used to value the cash flows from 2008 through 2012 while WACC is better suited for the terminal value (going concern value).
2. Based on the information in Exhibit 1, calculate the AirThread NOPAT adjusted for depreciation, changes in NWC, Capital Expenditures, and Un-Levered Free Cash Flow for each year 2008 through 2012.
3. Use the information in Exhibit 7 to estimate the asset beta for AirThread. What are the problems associated with using these data to estimate AirThread’s asset beta?
4. What discount rate should Ms. Zhang use for the un-levered FCF for 2008 through 2012? Is this the same discount rate that should be used to value the terminal value? Why or why not?
5. Estimate AirThread’s Interest Tax Shields for each year 2008 through 2012. Most practitioners discount tax shields that the yield to maturity. Are there any circumstances when this would not be the appropriate rate?
6. Using a long-term D/V assumption based on the existing industry norms, estimate a terminal equity beta, required return on equity, and WACC.
7. Develop an estimate of the long-term growth rate that should be used to estimate AirThread’s terminal value. Can a stable long-run growth rate exceed a company’s discount rate? Can a firm’s long-term growth rate exceed that of the economy in which it operates? Is zero the minimum growth rate? Using your estimate of long-term growth, what is the present value of the AirThread’s going concern value?
8. Why does the use of market multiples to value the non-operating investments in equity affiliates seem to be a reasonable methodology in light of the circumstances? (Hint: Develop P/E multiples from the data in Exhibit 7)
9. What is the total value of AirThread before considering any synergies?
10. What is the value of AirThread, assuming Ms. Zhang’s estimates of synergies are accurate?
11. Should the value of the tax shields reflect the personal tax disadvantages of interest income to ordinary debt holders? What is the personal income tax disadvantage of the debt? Show what happens if the net tax advantage to debt is 15%, instead of 40%?

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