INTERMEDIATE CORPORATE FINANCE (FIN 3504)

Spring 2018
Professor Pavel Savor

AirThread Connections Case Instructions and Questions

You can buy the case at: https://hbr.org/product/valuation-of-airthread-connections/4263-PDF-
ENG (choose the “English PDF” option).
You should prepare a written case report, with a page limit of five pages. Your report should be
accompanied by an appendix containing exhibits showing your analysis (the appendix does not
count towards the page limit). To prepare the exhibits, you will need to use Excel (or similar
spreadsheet software). Please provide titles and descriptions for all exhibits.
As for the previous two cases, you should structure your case report as an executive-style
memorandum, which contains the following components (in that order):
• Executive summary (one page at most)
• A brief introduction that describes the two companies (less than a page)
• Your analysis, which addresses questions 1 and 2 given below (the bulk of your write-
up)
• Conclusion (very brief, basically just giving your estimate of AirThread Connections’
value)
To facilitate your analysis (and save you from having to copy the information from the case), an
Excel spreadsheet with exhibits from the case is posted on Blackboard.
You should answer the following questions in your report.

1. Discuss the strategic rationale for American Cable Communications’ (ACC) acquisition of
AirThread Connections (ATC).

2. Estimate the enterprise value of ATC. Please ignore any synergies or illiquidity discounts
in your analysis.
You should use the following assumptions in your analysis. If you need additional
information (beyond the assumptions provided here and the information given in the case),
please make reasonable assumptions about the information you need, state those
assumptions clearly, and move on with your analysis.
Risk-free rate = 4.25%
Market risk premium = 5%

Finance 3504 Intermediate Corporate Finance © 2018 Pavel G. Savor

 ATC debt beta = 0
ATC marginal tax rate = 40%
In order to value ATC, you will need to go through the following steps (which should be
covered in your exhibits):
a) Compute ATC’s unlevered cost of capital.
(Hint: you will first need to compute ATC’s asset beta).
b) Forecast ATC's unlevered free cash flow (i.e., assuming ATC has no debt) for the
period from 2008 to 2012.
c) Estimate the present value of these cash flows.
d) Estimate the present value of interest tax shields for the 2008-2012 period. To
simplify your analysis, assume ATC will maintain a constant level of debt in this
period, and this debt will equal 4 times ATC’s EBITDA in 2007.
e) Compute ATC’s WACC. Assume here that ATC maintains a constant debt-to-
equity ratio, and that this debt-to-equity ratio will be determined based on leverage
levels in ATC’s industry.
(Hint: before computing WACC, you will need to first compute ATC’s projected
debt-to-equity ratio, then compute its equity beta, and use it to compute ATC’s cost
of equity.)
f) Estimate ATC's terminal value (based on free cash flows starting in 2013). Assume
ATC will maintain a constant debt-to-equity ratio starting in 2013 (i.e., rather than
staying constant, its debt will increase at the same rate as its equity), and that this
debt-to-equity ratio will be determined based on leverage levels in ATC’s industry.
(Hint: you will need to estimate ATC’s long-term growth rate to answer this
question.)
g) ATC also has non-operating assets (i.e., non-controlling equity investments).
Estimate the value of those assets using the trading multiple approach.
(Hint: the earnings on those assets are given by “Equity in Earnings of Affiliates”
on the Income Statement.)
h) Use information from from steps a) through g) to compute your estimate of ATC’s
enterprise value.

Finance 3504 Intermediate Corporate Finance © 2018 Pavel G. Savor