Read Case 3 (cable case). This case provides students opportunity to see the work of a financial analyst, to understand the functions fulfilled by equity analysts in capital markets and incentives analysts face in making their recommendations. It also allows students to dissect each valuation methodology (ROIC regression analysis, EBITDA multiple analysis, DCF analysis and real option analysis) and explores its implicit assumptions.
After you reading the case, contact your teammates and decide on how best to develop your answers to the questions below. Your answer should be clear and be easy for reader to understand how you find out the answer and why. Just provide a number without explanation will not earn you any point. The teams should map out critical path and ratably distribute work amongst the members. Please adhere to the prescribed format, MS Word, double spaced, Times Roman, or other true-type-font, and include the names of each team member on your final submission. Each team just lets one member submit the assignment by submitting it via the link in Module 9 named “Case 3 Assignment Submission”.
Each team should only submit one file in word document format. If you use excel to do the analysis, you may copy and paste your excel spreadsheet in the word document.
The grading will be based on:
Quality of analysis: Have you analyzed all the pertinent issues correctly and avoided obvious repetition of facts in the case?
Quality of recommendations: Have you offered specific plans of action and backed these up with strong arguments?
Writing: Do you present the material in a logical, clear way with no grammar/spelling errors?
Your write-up should begin with an opening paragraph that synopsizes the case (1 point), and answer all the following questions:
1. What are the tradeoffs in using multiples versus DCF analysis? (2 points)
2. How is Martin’s regression analysis different from/similar to traditional (standard) multiples analysis (1 point)? Do you agree with her interpretation of the regression analysis (1 point)? In other words, do you think that the 1.594 (adj enterprise value/avg invested capital reported in Exhibit 5, case page 13) Martin estimated using the regression analysis reasonable or not, explain why.
3. In Martin’s DCF analysis shown in Exhibit 7 (Case page 14), the terminal value in 2008 is $38454, which is equal to EBITDA of 2008E multiplied by EBITDA multiple of 13. What is the implied FCF growth rate (1 point)? Hint: calculate the value to FCF multiple first, then solving equation (V0/FCFF0) = (1+g)/(WACC -g). Suppose that the constant growth rate is 3%, what will be the terminal value (1 point)?
4. What are real options, and how they are different from financial options (2 points)?
5. Why is Martin pushing real options valuation as an alternative to DCF analysis (2 points)?
6. According to Matin’s real option analysis, identify the variables Martin used to proxy for factors determining option value and the implicit assumptions made. Fill out the blanks in the following table based on your understanding or Martin’s real option analysis (2 points).
Factors Proxy variable & value Implied Assumptions
asset price current average value of one channel, $23.15 valuation multiples include zero value for the stealth tier
time to expiration
risk free rate 5-10 year treasure yield NA