Prepare a report (4 -5 written pages, plus appendices) on this case. Please ensure you answer the following questions in your report. Do not assume any synergies between ACC and ATC when performing your analysis. Note this case requires extensive use of Excel.
Discuss the strategic advantages the acquisition of Air Thread (ATC) provides to American Cable Communications (ACC).
Estimate the total value of Air Thread. During your analysis you will need to do the following:
Forecast ATC’s Free Cash Flow for the period from 2008 to 2012.
Determine Air Thread’s Terminal Value (you need to estimate ATC’s long-term growth rate).
Calculate the WACC (calculate the required return of equity using CAPM. Use 4.25% as the risk free rate and 5% as the market risk premium. ATC tax rate = 40%)
Calculate the PV of these cash flows?
Based on the information given, how much debt can ACC take on to finance the Air Thread acquisition? What is the PV of the interest tax shield?
Air Thread also has non-operating assets (i.e. Equity in Earnings of Affiliates). How would you value these non-operating assets listed on the Air Thread Income Statement on Exhibit 4? (Hint: With no other information, you could use a market multiples approach using the competitive information in Exhibit 7).
What is the PV of the Equity in Earnings of Affiliates?
What is the Enterprise Value of Air Thread? Ignore the possibility of an illiquidity discount.
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