DEVELOP A PROJECTION OF DEBT-FREE FCF FOR AIRTHREAD USING THE INFORMATION PROVIDED IN THE CASE .

Accounts Receivable
Prepaid Expenses
Deferred Serv. Revenue
Accrued Liabilities
Accounts Payable
NWC
Change in NWC

2007
435.50
41.59
143.45
59.22
260.79

2008
521.90
62.26
62.06
30.31
157.38

2009
594.96
70.97
70.74
34.56
179.41

2010
669.33
79.84
79.59
38.88
201.84

2011
736.26
87.83
87.54
42.77
222.02

2012
787.80
93.98
93.67
45.76
237.56

13.63

334.40
320.78

381.22
46.82

428.87
47.65

471.76
42.89

504.78
33.02

First, we projected the change of NWC. According to the working capital assumptions given in Exhibit 1, we
projected the A/R in 2008-2012 by timing their corresponding turnover days with the projected sales over 360.
Similarly, we used projected operating expenses to estimate the deferred service revenue, accrued liability, and
A/P in 2008-2012. In addition, we anticipated the prepaid expenses by timing the corresponding years sales with
a fixed rate, 1.38%. Assuming that other current asset/liability items are not changing from 2008 to 2012, we
obtained the change in NWC as highlighted in the above table.

Revenue
T otal Operating Exp.
Expense
EBIT
Debt-free Earning
Less: Capital expenditure
Less: Change in NWC
Plus: D&A
FCF

2008
4,509.10
1,594.32
4,103.19
405.91
243.55
631.27
320.78
705.23
(3.28)

2009
5,140.38
1,817.53
4,677.64
462.74
277.64

2010
5,782.93
2,044.72
5,225.33
557.60
334.56

2011
6,361.22
2,249.19
5,716.05
645.16
387.10

2012
6,806.50
2,406.63
6,082.14
724.36
434.62

719.65
46.82
803.96
315.14

867.44
47.65
867.44
286.91

970.09
42.89
922.38
296.50

1,055.01
33.02
952.91
299.49

Second, we anticipated the FCF in 2008-2012 by subtracting the CAPEX and the increase in NWC from the aftertax EBIT while adding back the D&A. Revenue is consisted of two parts: service revenue and equipment revenue.
Expense includes system operating expense, cost of equipment sold, SG&A, and D&A. Then the debt-free
earning is acquired by deducting 40% tax from the EBIT. Consequently, FCFs are worked out as highlighted in
the above table.

ESTIMATE A TERMINAL VALUE CONSIDERING BOTH THE GOLDEN GROWTH MODEL AND AN EXIT EBITDA APPROACH.
EXPLAIN HOW YOU CALCULATED GROWTH RATE FOR THE GOLDEN GROWTH MODEL. ALSO EXPLAIN YOUR FINAL CHOICE OF
TERMINAL VALUE . DEVELOP A WACC FOR THE ACQUISITION .
Golden Growth Model Approach
Reinvestment rate
Return on capital
Growth rate

31.09%
6.02%
1.87%

(i) Growth rate (g) = Return on capital * Reinvestment rate

(ii) Return on capital = Net operating profit (NOPAT) in 2012/Total capital in 2012
NOPAT in 2012 = 434.62 (shown in the above FCF table)
Total capital in 2012 = Total capital in 2007*(1+Sales growth rate in 2008)*(1+Sales growth rate in
2009)*(1+Sales growth rate in 2010)*(1+Sales growth rate in 2011)*(1+Sales growth rate in 2012), in
which the total capital in 2007 is acquired from Exhibit 5.
(iii) Reinvestment rate = (investment in CAPEX + investment in WC D&A)/net operating profit

Comparable Companies:
Universal Mobile
Neuberger Wireless
Agile Connections
Big Country Communications
Rocky Mountain Wireless
Average

Debt/
Equity
92.3%
41.4%
24.1%
31.7%
44.4%
46.8%

Equity
Beta unlevered beta Re-levered beta
0.86
0.55
0.89
0.71
1.17
1.02
0.97
0.81
1.13
0.89
1.00
0.80
1.02

WACC
Cost of debt
Risk free
Cost of debt after tax
Risk premium
Cost of equity
WACC

5.50%
4.25%
3.30%
5.00%
9.37%
7.53%

According to the beta of comparable companies in Exhibit 7, we worked out the re-levered beta as 1.02, based on
which the cost of equity is acquired as 9.37. In terms of the average Debt/Equity ratio, 30.3%, we calculated the
weights of debt and equity and finally worked out WACC as 7.53%.
Terminal Value = FCF in 2012*(1+Growth rate)/(WACC-Growth rate)
= 299.49*(1+1.87%)/(7.53%-1.87%)
= $5,392.04 million
EBITDA Multiple Approach
Comparable Companies:
Universal Mobile
Neuberger Wireless
Agile Connections
Big Country Communications
Rocky Mountain Wireless
Average

Equity
Market Value
65,173
94,735
37,942
47,314
5,299

Net
Debt
60,160
27,757
9,144
15,003
2,353

EBITDA Enterprise value EBITDA multiple

16,949
125,333.22
7.39
14,099
122,492.32
8.69
9,914
47,085.99
4.75
12,614
62,316.79
4.94
1,028
7,651.94
7.44
6.64

In terms of data in Exhibit 7, the average EBITDA multiple is worked out as 6.64 as highlighted in the above
table. Subsequently, we calculated the terminal value by timing this multiple with the projected EBITDA in 2012.
The terminal valued is $11,141.26 million under this approach.

USE DCF MODEL TO CALCULATE THE VALUE OF AIRTHREAD OPERATING ASSETS BASED ON THE ABOVE WITH AND
WITHOUT SYNERGIES.
Without synergies we obtained the following values:
PV of TEV (GG)
$ 4,681.30 million
PV of TEV (EBITDA Multiple) $ 8,680.66 million
With synergies, we obtained the following values:
PV of TEV (GG)
$ 12,474.83 million
PV of TEV (EBITDA Multiple) $ 12,986.80 million

Here are the calculations using the original numbers from Exhibit 1 without synergies.
Revenue
T otal Operating Exp.
Expense
EBIT
Debt-free Earning
Less: Capital expenditure
Less: Change in NWC
Plus: D&A
FCF
Discount period
Discount factor
PV of FCF
PV of T EV (GG)
PV of T EV (EBIT DA Multiple)

2008
4,509.10
1,594.32
4,103.19
405.91
243.55
631.27
320.78
705.23
(3.28)
1
0.93
(3.05)

2009
5,140.38
1,817.53
4,677.64
462.74
277.64

2010
5,782.93
2,044.72
5,225.33
557.60
334.56

2011
6,361.22
2,249.19
5,716.05
645.16
387.10

2012
6,806.50
2,406.63
6,082.14
724.36
434.62

WACC
Cost of debt
Risk free
Cost of debt after tax
Risk premium
Cost of equity
WACC

719.65
46.82
803.96
315.14

867.44
47.65
867.44
286.91

970.09
42.89
922.38
296.50

1,055.01
33.02
952.91
299.49

2
0.86
272.55

3
0.80
230.77

4
0.75
221.79

5
0.70
208.34

5
0.70
3,750.90

T erminal Value
GG model
EBIT DA approach
5,392.04
11,141.26
5
0.70
7,750.27

$ 4,681.30
8,680.66

Reinvestment rate
Return on capital
Growth rate

31.09%
6.02%
1.87%

Accounts Receivable
Prepaid Expenses
Deferred Serv. Revenue
Accrued Liabilities
Accounts Payable

2007
435.50
41.59
143.45
59.22
260.79

2008
521.90
62.26
62.06
30.31
157.38

2009
594.96
70.97
70.74
34.56
179.41

2010
669.33
79.84
79.59
38.88
201.84

2011
736.26
87.83
87.54
42.77
222.02

2012
787.80
93.98
93.67
45.76
237.56

13.63

334.40
320.78

381.22
46.82

428.87
47.65

471.76
42.89

504.78
33.02

NWC
Change in NWC

5.50%
4.25%
3.30%
5.00%
9.37%
7.53%

Here are the changes in expenses and savings with synergies:

Backhaul Savings
Annual Business Revenue Increase

2008

2009

2010

2011

2012

0.00

13.40

25.80

52.50

76.00

156.00

269.00

387.00

570.00

704.00

Here are the updated revenue projections with synergies. We took into account the backhaul savings and the
business revenue increase as a result greater penetration into the business market.
Revenue Projections:
Se rvice Re ve nue
Service Revenue Growth

2,007
3,679.2

2008
4,350.3
18.2%

2009
5,050.5
16.1%

2010
5,766.2
14.2%

2011
6,487.2
12.5%

2012
7,035.4
8.5%

Equipme nt Re ve nue

314.8

358.8

403.7

444.1

475.2

Operating Expenses:
System Operating Expenses

838.9

942.9

1,050.0

1,130.9

1,190.3

Cost of Equipment Sold

755.5

861.2

968.9

1,065.8

1,140.4

1,803.6

2,056.2

2,313.2

2,544.5

2,722.6

Depreciation & Amortization

705.2

804.0

867.4

922.4

952.9

T ax Rate

40.0%

40.0%

40.0%

40.0%

40.0%

41.67x
154.36x
1.38%
35.54x
14.01x

41.67x
154.36x
1.38%
35.54x
14.01x

41.67x
154.36x
1.38%
35.54x
14.01x

41.67x
154.36x
1.38%
35.54x
14.01x

41.67x
154.36x
1.38%
35.54x
14.01x

6.85x

6.85x

6.85x

6.85x

6.85x

653.1
14.0%

757.3
14.0%

925.5
15.0%

1,057.0
15.3%

1,164.1
15.5%

Selling, General & Administrative

Working Capital Assum ptions (1):

Accounts Receivable
Days Sales Equip. Rev.
Prepaid Expenses
Accounts Payable
Deferred Serv. Revenue
Accrued Liabilities
Capital Expenditures (2):
Capital Expenditures
Cap-x/Total Revenue

Here are the calculations of the value of Airhead assets using the numbers with synergies.
Revenue
T otal Operating Exp.
Expense
EBIT
Debt-free Earning
Less: Capital expenditure
Less: Change in NWC
Plus: D&A
FCF
Discount period
Discount factor
PV of FCF
PV of T EV (GG)
PV of T EV (EBIT DA Multiple)
Reinvestment rate
Return on capital
Growth rate

Accounts Receivable
Prepaid Expenses
Deferred Serv. Revenue
Accrued Liabilities
Accounts Payable
NWC
Change in NWC

2008
4,665.10
1,594.32
4,103.19
561.91
337.15

2009
5,409.38
1,804.13
4,664.24
745.14
447.08

2010
6,169.93
2,018.92
5,199.53
970.40
582.24

2011
6,931.22
2,196.69
5,663.55
1,267.66
760.60

2012
7,510.50
2,330.63
6,006.14
1,504.36
902.62

653.11
354.61
705.23
34.65

757.31
63.55
803.96
430.18

925.49
64.88
867.44
459.31

1,057.01
70.78
922.38
555.19

1,164.13
54.06
952.91
637.33

2
0.86
372.05

3
0.80
369.43

4
0.75
415.28

5
0.70
443.35

5
0.70
10,842.49

2008
539.95
64.41
62.06
30.31
157.38

2009
626.10
74.69
70.22
34.30
178.09

2010
714.12
85.19
78.58
38.39
199.29

2011
802.24
95.70
85.50
41.77
216.84

2012
869.28
103.70
90.71
44.31
230.06

354.61
354.61

418.17
63.55

483.05
64.88

553.82
70.78

607.89
54.06

1
0.93
32.22

WACC
Cost of debt
Risk free
Cost of debt after tax
Risk premium
Cost of equity
WACC

T erminal Value
GG model
EBIT DA approach
15,586.44
16,322.41

$ 12,474.83
12,986.80
29.39%
11.24%
3.30%
2007
-

5.50%
4.25%
3.30%
5.00%
9.37%
7.53%

5
0.70
11,354.46

ADD THE VALUE OF EXCESS CASH, SECURITIES, INVESTMENTS (NON-OPERATING ASSETS) TO ARRIVE AT A TOTAL VALUE OF
THE FIRM . SUBTRACT FROM THIS AMOUNT THE ANTICIPATED DEBT TO ARRIVE AT A VALUE OF EQUITY .

Without
Synergies

With
Synergies

Gordon Growth
EBITDA mult.
Average

4,681.30
8,680.66
6,680.98

12,474.83
12,986.80
12,730.82

Non-Operating Assets
Cash & Cash Equivalents
Marketable Securities
Total Non operating assets

204.50
16.40
220.90

204.50
16.40
220.90

Value of firm

6,901.88

12,951.72

Anticipated Debt
Debt to Value
Debt

30.30%
2,091.27

30.30%
3,924.37

Value of Equity

4,810.61

9,027.35

Value of Assets

THE ANALYSIS ABOVE SUFFERS FROM THE FACT THAT IT IS A HIGHLY LEVERED TRANSACTION USING A CONSTANT WACC
DISCOUNT RATE , WHEN IN FACT THE LEVERAGE IS CHANGING RAPIDLY . ONE SOLUTION IS TO USE APV.

IGNORE NON-OPERATING ASSETS INITIALLY

ASSUME SAME DEBT AS CASE ABOVE BUT THAT DEBT IS PAID DOWN WITH ANY POSITIVE CASH FLOW EACH YEAR .
ADJUST INTEREST PAYMENTS ACCORDINGLY AND A SSUME PRINCIPAL PAYMENTS ARE AT END OF EACH YEAR .
CALCULATE THE AMOUNT THAT CAN BE PAID FOR EQUITY TO GIVE EQUITY A 15% IRR OVER THE HOLDING
PERIOD. DO THIS FOR THE SYNERGY CASE ONLY.
ADD THE VALUE OF INITIAL DEBT AND THE VALUE OF NON-OPERATING ASSETS TO ARRIVE AT THE TOTAL ENTITY
VALUE UNDER THIS APPROACH .

DCF model incorporates the debt impact into its cost of capital (a ratio). However, APV is to calculate a firms
unlevered value first and then obtain the levered firm value by adding back the net borrowing benefits (a value).
Net borrowing benefits involve two main factors: tax benefits and bankruptcy costs. With little information about
bankruptcy probability and costs, we decided to ignore it in our APV model. As shown in the following table,
debt-free FCFs and terminal value are discounted by the unlevered cost of equity (15%), while projected debts are
discounted by the interest rate (5.5%). Total enterprise value (TEV $11,377.97 million) is then worked out by
adding them together, and equity value ($7,232.7 million) is obtained by subtracting current debt and adding nonoperating assets from TEV.