Generally Accepted Accounting Principles and Capital Assumption Factor
This case deals with the valuation of AirThread Connections Business (ATC) from the perspective of its potential acquirer, American Cable Communication (ACC). ACC is a large cable operator which serves the video, internet and landline telephony needs of millions of users across America. However it is recently looking to acquire ATC which is one of the largest wireless companies in the United States. This acquisition will bring with it certain synergies that both can benefit from, which is primarily the reason behind the valuation requirements of AirThread.
Methodological approach to value AirThread American Cable Communication is interested in raising significant capital following the Leveraged Buyout (LBO) approach. This implies that the purchase is financed primarily through debt. As this means that ACC will not be maintaining their current debt to equity ratio therefore relying on the WACC method to calculate the value of AirThread would not be appropriate. For the valuation of AirThread in this case analysis we are using APV. However we will still need to calculate the WACC for the purposes of the APV valuation.
To calculate the discount rate for AirThread, we have looked at the industry Asset Beta (this measures the systematic business risk). The Asset Beta for each firm is calculated using the formula ? a= ? e/1+(D/E)(1-t) e. g. For Universal Mobile this value is computed as follows (we are using the tax rate as 40%) 0. 86 / (1 + (0. 923)(1-0. 4) = 0. 5534 The Industry average is simply the average of all the firms listed. Once we have the Asset Beta, we can calculate the Equity beta using the following formula.
The highlighted row represents the average Debt/Value ratio for the industry as seen in the previous table. Therefore the Unlevered Cost of Capital for ATC can be assumed to be 8. 29% and the rwacc is 8. 01%. The rwacc is calculated using the formula rwacc = E*re/(E+D) + D*rd*(1-tax rate)/(E+D) Terminal Value Calculation of AirThread To calculate the Terminal value of AirThread, we will treat it like a perpetuity and therefore we need to account for a growth rate.