1.

Describe the methodology that you use to value Air Thread Connections [Hint: it may be possible to use more than one technique simultaneously]. APV method will be used in the first five years WACC method will be adopted during the period of 2013-infinity 2. Outline how you: a. value cash flows for 2008 through 2012?

b. estimate the terminal value or going concern? Assuming the free cash flow after 2012 has the same growth rate,g FCF 2013 = free cash flow 2012 * (1+g) Terminal value = FCF 2013 / (WACC-g) WACC = E/V*Re + D/V*Rd(1-tax rate) c. account for the non-operating investments in equity affiliates? The valuation is based on the firms operating activity to forecast its main operating activities. Non-operating assets/liabilities are not included in the valuation, but non-operating assets/liabilities are adjusted after the firm value to get the value for the shareholders. As investments in equity affiliates are belonging to non-operating category, thus it is not considered in the valuation. 3. Explain the choice of the rate that you use in: a. discounting un-levered FCF for 2008 through 2012 i) Excluding Synergy The current debt ratio of ATC is 8.6%, which is assuming that will not change in the future. Thus using Rd = 8.6% 10-year government bond yield = 4.25% Market risk premium = 5% Equity beta is estimated changed with average industry asset beta and DV ratio.
AverageAssets (equity debt * DE% * (1 tax %)) /(1 DE% * (1 tax %)) 0.82

1 1001.4 1001.8 1002.3 DE% ( ) 72% 3 1375 1378.9 1404.1 DV % 42% 1 Equity assets /( ) 1.41 1 DV %
Re 4.25 1.41* 5% 11.28%

WACC 8.6% *

72 100 * (1 40%) 11.28% * 8.71% 172 172

ii) with Synergy Because in the first 5 years, APV method assumes there is no debt finance, thus DE ratio is zero and then equity beta is equal to the average assets beta, 0.82. WACC1 = Re= 4.25+0.82*5 = 8.33% for first period b. discounting the terminal value? i) Excludes synergy, the discount rate 8.68% ii) With synergy As DE ratio is changed to 40%, and equity beta is 1.13. Cost of equity = 4.25+1.13*5 = 9.92% 1 39% WACC 2 9.92% * 5.5% * * (1 40%) 8.06% 1 39% 139% c. estimating the long-term growth? i) Excluding synergy The average growth rate of FCF in first 5 years is nearly 1. Thus it sets 1 as the perpetual growth rate. 4. Calculate the present value of Air Tread Connections on a going concern basis [Hint: use your long-term growth estimate in 3.c. above, and the supplementary publisher spread sheet. 5. Calculate the total value of Air Thread Connections: a. before considering any synergies Based on question, after applying illiquidity discount rate 22% , the value of ATC is $3,114. b. including synergies, assuming your estimates are correct [Hint: use the supplementary Publisher spread sheet.