Finance 3504 Instructions for AirThread Connections

Finance 3504
Instructions for AirThread Connections
(1) The case should be written as an executive memo, containing the following sections:
 Executive Summary
 Introduction
 Analysis and Recommendations
 Conclusion (brief summary)
(2) Do NOT just answer the questions as in a homework style format. Note the following:
 The case analysis is done in group.
 The case report should be (1.5 spaced, 12 point font) with up to 8 pages of appendices (graphs, tables, etc.). Please do NOT insert appendices from the case into your report unless you have added your own calculations to the page.
 Executive Summary should include:
o 2 to 3 sentence overview of the firm
o Brief statement of the situation/problem
o Your recommendation. Include important numbers in the recommendation, but do not show how they are calculated (the calculations should be in an appendix).
o The executive summary should be about ¾ page to 1 page. The intent is that if an executive read only the executive summary, they should be able to understand the situation, the problem, and your recommendations, without reading the rest of the report.
 Introduction: This section should briefly describe the company, the current situation and the issues.
 Analysis and Recommendations: This section is the most important section. This should be the main component (and longest section) of the report. Most importantly, you must take a position regarding the issues and make specific recommendations on how to overcome them. Also, make sure you provide support for you recommendations. Use specific data and/or calculations to provide this support.
 Conclusion: This section should briefly summarize the main conclusion.
Policies on the submission of the case analysis:
Due Date: 5:30 PM, Dec 11, 2017.
(1) Please send the completed report along with the Excel files (if there is any) in which you do the calculations to me via email, one copy per group. No hard copy is accepted. Please do not send duplicates for the same group.
(2) Do not forget to put your names and Section Number 006 on the report.
(3) If you have not purchased the case yet, please use this URL:
http://cb.hbsp.harvard.edu/cbmp/access/65827343.
Case Questions:
The case questions are designed to assist you in focusing on the issues. If you believe that the questions do not fully address the issues, then you may go outside the parameters of the questions.
Purpose of this case: The main purpose of this case is to estimate the value of AirThread Connections. This will be our focus.
Assumptions for the case: We simplify the calculations by imposing the following assumptions:
(1) We do not consider personal taxes in this case
(2) We do not consider the expected bankruptcy costs or costs of financial distress in this case
(3) We do not consider the value of synergies from this merger between American Cable and AirThread Connections
(4) We assume the dividend payout ratio is 0
How to estimate the value of AirThread?
1. What is the general valuation method for AirThread?
(1) What valuation method is more appropriate for cash flows in explicit forecast period, DCF or APV?
(2) What valuation method is more appropriate for cash flows in terminal value period, DCF or APV?
(3) What is the general valuation equation for AirThread?
2. Using the information in Exhibit 1, what is the estimated unlevered cash flow from assets (CFFA) for years 2008-2012?
3. What is the present value in year 2007 of cash flows in explicit forecast period (years 2008-2012)?
(1) What is the value of unlevered firm during this period? [Information in Exhibit 7 is needed]
(2) What is the present value of interest tax shield during this period? We assume that the relevant corporate tax rate is 40% and the cost of debt as the discount rate. [Information in Exhibit 6 is needed]
4. What is the present value in year 2007 of cash flows in the terminal value period (years beyond 2012)?
(1) We assume the long-term growth rate of EBIT is 2.9%
(2) We assume the debt-equity ratio is constant at around 40.1%
(3) We assume the corporate tax rate is 40%
(4) The relation between unlevered and levered betas in this part is as follows: ??????????=????????/(1+??)
5. What is the value of non-operating assets?
(1) The relevant historic P/E multiple is 19.095 in footnote 3
(2) What is the equity in earnings of affiliates in 2007?
(3) What is the estimated value of non-operating assets using a market multiple approach?