Valuation of Air Thread Connections Harvard Case Solution & Analysis

Enterprise Value before Synergies:

The enterprise value of Air Threads Connections before assuming any synergies is 22,096.85 dollars,which is a sum of all present values of cash flows along with the present value of continuing value and present value of tax saving benefits by paying an interest amount to debt holders and non-operating assets, which are; $ 4,731.79, $ 15,361.1, $ 284.75 and $ 1,719.18 respectively.

Enterprise Value after Synergies:

The enterprise value of Air Threads Connections after assuming any synergies is 27,736.83 dollars,which is a sum of all present values of cash flows along with the present value of continuing value and present value of tax saving benefits by paying an interest amount to debt holders and non-operating assets, which are; $ 5,695.43, $ 20,037.43, $ 284.75 and $ 1,719.18 respectively.

An increase in the enterprise value is a result of an increase in annual business revenues which is a result of synergy with American Cable Communications (ACC) that will have a cause of increase in dollar revenues from the year 2008 to infinity. Here, it has been assumed that the cash flows which are coming from synergies are not riskier than any other Air Threads cash flows.

Enterprise Value after Synergies with Riskier Cash Flows:

After assuming the cash flows which are coming from synergies with American Cable Communications (ACC) are riskier than any other cash flows, the enterprise value of Air Threads Connections is 12,096.08 dollars, which is the sum of all present values of cash flows along with the present value of continuing value and non-operating assets that are $ 4,885.12, $ 5,491.79 and $ 1,719.18 respectively.

For calculating present value of these riskier cash flows, 13 % WACC has been considered for discounting purpose. Here, no interest tax shield has been applied for valuation purpose because it has been assuming that it is all equity based company which does not pay any interest in further years to repay its debt liability.

Recommendation and Conclusion:

Synergy in the form of acquisition will be beneficial for both of the companies that will allow a syndicate path to generate more profits and efficiency in operations, which will provide cost effectiveness ultimately more profits(VAIDYA, 2018).

Synergies provide benefits in the form of revenues, cost and financial perspective that will help the company to produce more with less.

By calculating enterprise value of Air Thread Connections from three different perspectives, it has been recommended that American Cable Communications (ACC) offer priced will be between $ 12,096.08 and $ 27,736.83. Any other offer price that is not lying in stated range might lead to a rejection of a bid ultimately resulting in the loss for both the companies because Air Thread Connections will not accept any offer that is below $ 12,096.08.

This synergy will provide a competitive advantage because one company is expert in video, internet and landline telephony while another is wireless technology provider. This synergy will help to increase the target market for the company by getting an expertise in different technologies, by incurring lower expenses.

Exhibit 1: WACC Calculations

Tax Rate0.4
Unlevered Equity Beta1.04
Risk Free Rate5.50%
Market Risk Premium5%
Cost of Debt5.50%
Cost of Debt After Tax3.30%
Weight of Equity56.95%
Weight of Debt43.05%
Cost of Capital10.69%
WACC7.51%

Exhibit 2: Tax Savings

Tax Savings
Years200720082009201020112012
Interest Expense199183166148128
Tax Rate40%40%40%40%40%
Tax Savings8073665951
Interest Rate / Discount Factor5.50%       0.948  0.898  0.852       0.807  0.765
Present Value of Tax Savings            76       66       56            48       39
NPV Tax Savings        285

Exhibit 3: Valuation before Synergies

Net Present Value

  20,092.89

Tax Savings       284.78
Non-Operating Assets    1,719.18
Total Enterprise Value  22,096.85
WACC7.51%
Growth Rate3%
Industry P/E Ratio19.095
Equity in Earnings of Affiliates90.033

Exhibit 4: Valuation after Synergies

Net Present Value

  25,732.86

Tax Savings       284.78
Non-Operating Assets    1,719.18
Total Enterprise Value  27,736.83
WACC7.51%
Growth Rate3%
Industry P/E Ratio19.095
Equity in Earnings of Affiliates90.033

Exhibit 5: Valuation with Risky Synergies

Net Present Value

  10,376.90

Non-Operating Assets    1,719.18
Total Enterprise Value  12,096.08
WACC13.00%
Growth Rate3%
Industry P/E Ratio19.095
Equity in Earnings of Affiliates90.033
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