Air threads measure of value can be evaluated by the following methods; discounted cash flow this refers to the existing estimate of Air Thread Company using its future opportunities of investment. Comparable transactions method can also apply in the likelihood of occurrence of an akin transaction that may have occurred in a condition that is similar to an existing one. Multiple methods may also be incorporated to ascertain the value of Air thread in comparison to another firm that may be comparable to it, for example, the American cable communications company itself. The market valuation also applies which refers to the value in our case of Air thread that it can trade in a competitive sale context. (Oded, 2007)
Cash flows are the total amount of money, and it’s equivalent money that transfers in and out of business that affects the business’s net worth. Cash flows are either positive or negative, positive cash flows associates themselves with an increase in liquid assets, ability to repay shareholders, pay their day to day business expenses and also to eliminate a threat of financial difficulties . Negative cash flows are the opposite of all the points associated with a positive cash flow (Barth, 2001). Air thread’s cash flows from 2008 to 2012 can be valued from projections based on; the result of the potential synergy of merging American cable communications and Air thread. Incomes from projected investments that the merger would bring about, as well as the estimated operations costs of their activities and the appropriate cost of capital to begin the merger.
The Terminal value refers to the current value of a financial security in a forecasted time for the expected cash flows when the rate of growth remains stable. To estimate terminal value, in most cases analysis using discounted cash flow method is used, and for it to hold only projections of up to a given period are utilized. Terminal value is an estimate of the attractiveness of an investment opportunity(Courteau, 2000), thus, in the case of American Cable Communications, terminal value is can be evaluated by the expected cash flow of its merger with Air thread projected to a given number of years of operation.
Discount rate refers to the lowest rate of interest that is set by the Federal Reserve to lend out to banks also the rate of exchange in premium bills. It can also refer to the rate of interest that applies to discounted cash flow method of determining the value of future cash flows. Free cash flows from the abbreviation FCF is the monetary performance that arises from the subtraction of the value of expenditures of capital from cash flows. Thus, for our case study, the rate of discount of free cash flow that should be is as follows; the rate of discount should incorporate the value of the business minus its owed debts. Investing in risk free credits, company’s share price against the whole market, the risk premium of a market of equity, cost of a company’s debt and finally a company’s structure of capital. Drawing from these factors thus, the discount rate of an FCF can be obtained. (Shrieves, 2001)
Despite the difficulty of forecasting cash flows for over an extended period, it is important to estimate a growth rate for over a prolonged period of time for monetary security and to keep a business afloat. Growth rate refers to the rate at which a company’s revenue, dividends, earnings and concepts from the macro economy. Thus, for estimating the long-term growth rate of a firm’s terminal value is based on the factors as discussed in defining the term growth rate.
Air thread’s value before considering its merger with American cable communications includes; accounts on its cash and marketable securities, high-quality network assets, its valuable wireless spectrum licenses, its steady cash flow as well as its acquired customer base.
Synergies refer to the merging or acquisition of two or more firms to produce an effect greater as a result of their combination than their total effects acting on a separate basis. Synergies may have the effect of failure or success; success is attributed to increasing in prices of shares due to their combined effect due to combining talent, increasing revenues as well as technology and reduction in costs (Kaplan, 2006). Air threads acquisition by American cable communications can increase its value owing to the following factors; Air thread’s mounting pressure from retention costs of customers due to high assets can be solved by a merger, and the turning effect increases revenue, its slow growth rate can be affected by harsh competition which can make it dissolve but can be averted by merging with American cable communications to not only grow but also increase its market value, Air Thread’s cost disadvantages can also be settled related to wireless competitors owned by ILECs and increase its value, also an increase in its customer base due to some of the clients who American cable communications might also pool in enhances the value of Air thread revenue accrued from an increased customer base. All the highlighted points reflect the quantitative aspect of growth in value. The qualitative perspective of an increase in value of Air Thread include; merging with American Cable Communications will increase its network utilization, it will also help to provide a quality broadcast of its services as it can invest in relatively expensive operations to improve its service delivery, a merger would also help Air Thread to create substantially greater trudges in financial, sales, marketing, technical resources and distribution helping it to evade the thread of being weeded out by national wireless carriers and thus able to maintain its operations, a synergy between the two companies also contribute to create a pool of funds and thus improving their quality of call, quality of network service and customer service.
References
Oded, Jacob, and Allen Michel. “Reconciling DCF valuation methodologies.” Journal of Applied Finance I17.2 (2007): 21.
Barth, M. E., Donald P. Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(1), 27-58
Courteau, L., Kao, J. L., & Richardson, G. D. (2000). The Equivalence of Dividend, Cash Flows, and Residual Earnings Approaches to Equity Valuation Employing Ideal Terminal Value Expressions. Cash flows and Residual Earnings Approaches to Equity Valuation Employing Ideal Terminal Value Expressions (February 3, 2000).
Shrieves, R. E., & Wachowicz Jr, J. M. (2001). FREE CASH FLOW (FCF) ECONOMIC VALUE ADDED (EVA), AND NAT PRESENT VALUE (NPV): A RECONCILIATION OF VARIATIONS OF DISCOUNTED_CASH_FLOW (DCF) VALUATION. The engineering economist, 46(1), 33-52
Kaplan, R. S., & Norton, D. P. (2006). Alignment: Using the Balanced Scorecard to create corporate synergies. Harvard Business Press, 2006
