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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 PG ID
Aditi Mittal 61310666
Jyotsna Mahara 61310500
Sahil Dhar Hakim 61310491
Sumit Pokhriyal 61310475
Vishal Lahoti 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%
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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.


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 :

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.
Equity Net Debt/ Debt/ Equity Revenue EBIT EBITDA Net (Asset) Weightage Weighted Beta
Comparable Companies: Market Value Debt Value Equity Beta Income Unlevered
Universal Mobile 65,173 60,160 48.0% 92.3% 0.86 43,822 11,795 16,949 3,794 0.45 1.00 0.45
Neuberger Wireless 94,735 27,757 29.3% 41.4% 0.89 42,684 7,020 14,099 4,103 0.63 1.00 0.63
Agile Connections 37,942 9,144 19.4% 24.1% 1.17 34,698 1,631 9,914 (30) 0.94 1.00 0.94
Big Country Communications 47,314 15,003 24.1% 31.7% 0.97 38,896 6,702 12,614 3,384 0.74 1.00 0.74
Rocky Mountain Wireless 5,299 2,353 30.7% 44.4% 1.13 4,064 510 1,028 240 0.78 1.00 0.78
Average 50,093 22,883 30.3% 46.8% 1.00 164,164 5,532 5.00 3.54
Unlevered
Beta 0.71
Average P/E 13.19
Debt/ Debt/ Asset Equity Cost of Cost of
Value Equity Beta Beta Equity Debt
0.00% 9.00% 0.76 0.70 7.74% 5.50% 7.37%
Unlevered Cost of Capital
Working Capital Assumptions 2007 2008 2009 2010 2011 2012
Accounts Receivable 435.5 521.93 595.00 669.37 736.31 787.85
Days sales equip rev. 101.0 134.97 153.86 173.10 190.41 203.73
prepaid expenses 41.6 46.89 53.46 60.14 66.15 70.78
Accounts Payable 260.8 335.45 382.42 430.22 473.24 506.37
Deferred Serv. Revenue 143.4 132.24 150.75 169.59 186.55 199.61
Accrued Liabilities 59.2 64.66 73.71 82.92 91.21 97.60
Net Working Capital 114.6 171.4 195.4 219.9 241.9 258.8
Increase in NWC 0 56.8 24.0 24.4 22.0 16.9
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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


2008 2009 2010 2011 2012
Interest Expense per Annum ($mn)
199.43 183.08 165.80 147.55 128.27
Principal payment per Annum
289.92 306.28 323.55 341.80 2,495.99
After-Tax Interest Expense per Annum
119.66 109.85 99.48 88.53 76.96
2008 2009 2010 2011 2012
Tax Shield 79.77 73.23 66.32 59.02 51.31
PV of Tax Shield 75.61 65.79 56.48 47.64 39.26
2008 2009 2010 2011 2012
Operating Results:
Service Revenue 4,194.33 4,781.54 5,379.23 5,917.15 6,331.35
Plus: Equipment Sales 314.77 358.84 403.70 444.07 475.15
Plus: Synergy Related Business Revenue 0.00 0.00 0.00 0.00 0.00
Total Revenue 4,509.10 5,140.38 5,782.93 6,361.22 6,806.50
Less: System Operating Expenses 838.87 956.31 1,075.85 1,183.43 1,266.27
Plus: Backhaul Synergy Savings 0.00 0.00 0.00 0.00 0.00
Less: Cost of Equipment Sold 755.46 861.22 968.87 1,065.76 1,140.36
Less: Selling, General & Administrative 1,803.64 2,056.15 2,313.17 2,544.49 2,722.60
EBITDA 1,111.14 1,266.70 1,425.04 1,567.54 1,677.27
Less: Depreciation & Amortization 705.23 803.96 867.44 922.38 952.91
EBIT 405.91 462.74 557.60 645.16 724.36
Tax Rate 40% 40% 40% 40% 40%
Earnings After taxes 243.55 277.64 334.56 387.10 434.62
Un-Levered Free Cash Flow 260.65 337.90 310.17 317.39 315.60
Present Value of FCF 242.76 293.11 250.58 238.81 221.17
Excess Cash: 2008 2009 2010 2011 2012
Less: After-Tax Interest Expenses (119.7) (109.8) (99.5) (88.5) (77.0)
Less: Scheduled Principal Payments (289.9) (306.3) (323.6) (341.8) (2,496.0)
Excess Cash (148.9) (78.2) (112.9) (112.9) (2,257.4)
Cash on Balance Sheet 55.57 (22.6) (135.5) (248.5) (2,505.8)
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APV value of AirThread should be the summation of PV(FCF) + PV(Interest Shield) + PV(Non
Operating asset) + PV(Terminal Value)


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.



NPV Calculation 2008 2009 2010 2011 2012
Present Value of FCF 242.76 293.11 250.58 238.81 221.17
Interest Tax Shields 79.8 73.2 66.3 59.0 51.3
PV of Interest Tax Shields 75.6 65.8 56.5 47.6 39.3
Terminal Value Growth rate 3% Taking long term economy growth rate
TV at end of 2012 7438.62
PV of Terminal Value 5212.89
Equity in earnings of Affiliates 90 from exhibit 4
Value of affliates 1187.33
NPV of the Airthread 7,931.43
Wireless Business Subscribers: 2008 2009 2010 2011 2012
Average Monthly Subscribers (in MM's) 0.30 0.50 0.70 1.00 1.20
Average Monthly Minutes 859 885 911 939 967
Total Monthly Minutes 258 442 638 939 1,160
Revenue Per Minute 0.0506 0.0506 0.0506 0.0506 0.0506
Annual Business Revenue Increase 156.5 268.6 387.3 569.9 704.5
Backhaul Savings: From Table 4
System Operating Expenses 838.9 956.3 1,075.8 1,183.4 1,266.3
Backhaul Percentage 20.0% 20.0% 20.0% 20.0% 20.0%
Estimated Backhaul Costs 167.8 191.3 215.2 236.7 253.3
Reduction in Backhaul Costs 0.0% 7.0% 12.0% 22.2% 30.0%
Backhaul Savings 0.0 13.4 25.8 52.5 76.0
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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:-

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 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.



Working Capital Assumptions 2007 2008 2009 2010 2011 2012
Accounts Receivable 435.5 540.04 626.09 714.21 802.28 869.39
Days sales equip rev. 101.0 134.97 153.86 173.10 190.41 203.73
prepaid expenses 41.6 47.76 54.75 61.92 68.57 73.62
Accounts Payable 260.8 341.63 391.70 442.97 490.56 526.69
Deferred Serv. Revenue 143.4 134.67 154.41 174.62 193.38 207.62
Accrued Liabilities 59.2 65.85 75.50 85.38 94.55 101.51
Net Working Capital 114.6 180.6 213.1 246.3 282.8 310.9
Increase in NWC 0 66.0 32.5 33.2 36.5 28.2
NPV Calculation 2008 2009 2010 2011 2012
Present Value of FCF 295.80 391.17 387.47 430.87 450.61
Interest Tax Shields 79.77 73.23 66.32 59.02 51.31
PV of Interest Tax Shields 75.61 65.79 56.48 47.64 39.26
Terminal Value Growth rate 3% Taking long term economy growth rate
TV at end of 2012 15155.7
PV of Terminal Value 10620.93
Equity in earnings of Affiliates 90 from exhibit 4
Value of equity affliates 1187.331
NPV of the Airthread 14048.97
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Taking the above synergy in account, the estimated FCF and Cash in Balance sheet is as below:-
Table1


2008 2009 2010 2011 2012
Operating Results:
Service Revenue 4,194.33 4,781.54 5,379.23 5,917.15 6,331.35
Plus: Equipment Sales 314.77 358.84 403.70 444.07 475.15
Plus: Synergy Related Business Revenue 156.48 268.62 387.34 569.95 704.46
Total Revenue 4,665.58 5,408.99 6,170.27 6,931.17 7,510.96
Less: System Operating Expenses 838.87 956.31 1,075.85 1,183.43 1,266.27
Plus: Backhaul Synergy Savings 0.00 (13.39) $ (25.82) $ (52.54) $ (75.98) $
Less: Cost of Equipment Sold 755.46 861.22 968.87 1,065.76 1,140.36
Less: Selling, General & Administrative 1,866.23 2,163.60 2,468.11 2,772.47 3,004.38
EBITDA 1,205.03 1,441.26 1,683.26 1,962.06 2,175.92
Less: Depreciation & Amortization 729.70 845.97 925.54 1,005.02 1,051.53
EBIT 475.32 595.28 757.72 957.04 1,124.39
Less: Interest Expense 199.4 183.1 165.8 147.5 128.3
Earning before taxes
275.9 412.2 591.9 809.5 996.1
Tax Rate 40% 40% 40% 40% 40%
Net Income 165.54 247.33 355.16 485.69 597.67
Un-Levered Free Cash Flow 317.6 451.0 479.6 572.6 643.0
Present Value of FCF 295.80 391.17 387.47 430.87 450.61
Excess Cash: 2008 2009 2010 2011 2012
Less: After-Tax Interest Expenses (119.7) (109.8) (99.5) (88.5) (77.0)
Less: Scheduled Principal Payments (289.9) (306.3) (323.6) (341.8) (2,496.0)
Excess Cash (92.0) 34.8 56.6 142.3 (1,929.9)
Cash on Balance Sheet 112.52 34.84 56.58 142.30 (1,929.95)