1. What does it mean if a company “trades at a discount”? Is Amtelecom Group Inc. (AGI) really trading at a discount?
If the market value of a stock is lower than its intrinsic value, this stock is defined as “trades at a discount”. To figure out whether AGI stock is traded at a discount to comparable companies, as its management believed, we can simply apply multiple which comes from the average multiple of its comparable companies. Considering fluctuation of future after-tax earnings caused by the change in capital structure, we prefer to use TEV/EBITDA multiple in this case. Amtelecom Group consists of two lines of business which has to been taken into consideration. We separately calculate the value of both companies and their
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Terminal valuation was calculated as 52.97 million by using the GGM method and 52.29 million by using the Hybrid approach. Finally, we have the Enterprise Value of 72.52 million and 71.84 million under these two different approaches (Note 4). All the assumptions involved in the calculation are demonstrated in Note 5. We note that the EBITDA multiple and the GGM model generate very similar terminal value estimates in this case. Nevertheless, we prefer to use EBITDA multiple for the first and second sales alternatives. For the third one, we use the income trust valuation formula provided by appendix 1 of case. The first reason is that EBITDA method ties the analysis of distant cash flows back to recent market transactions involving comparable firms. The second reason is that we do not have sufficient clues to predict an absolutely correct growth rate of Amtelecom Communications. As for APV, since Amtelecom will not have substantial capital structure change, we do not consider this method for our analysis. For sales to Strategic Buyer, we assume that the Amtelecom Communication is traded at no discount or premium. It is a rational guess because the TEV indicated an EBITDA multiple which falls in the normal range 5 to 7. The net proceed is 67.53 million (Note 7). In the second situation, the Amtelecom Communication is traded at a discount between 10% and 20%. We use the average discount rate 15% to get the net proceeds