Nextel Partners: Put Option Case Study Questions

Question 4: Valuation. Choose whether you want to work for Morgan Stanley, the appraiser chosen by Nextel Partners,

or for Lazard Frres, the appraiser chosen by Sprint Nextel. (Since there is no "easy" pick, you might want to simply toss a coin.)

Considering your client, derive FMV estimates for Nextel Partners' share price by way of:

A DCF valuation using the Capital Cash Flow method

Irrespective of your assigned role, follow the instructions below.

DCF valuation:

• Use Exhibit 4
• Use 31-Dec-05 as the date of the valuation.
• Assume that cash flows are realized at the end of each year.
• Use the Capital Cash Flow method.1 Inter alia, remember:
• Compute the true levered cash flows of the firm (not the unlevered cash flows)
• Exhibit 4 forecasts the actual "cash taxes" the firm expects to pay, i.e., the tax bill net of all tax-deductible items (including interest)
• Use the unlevered cost of capital (asset discount rate) as the discount rate.
• Assume a risk-free rate of 4.75%.
• Choose a market risk premium between 4.5% and 5.5%.
• Assume that the projected changes in net working capital are zero.
• Add the PV of spectrum purchases to the cash flows on 31-Dec-05. Assume that its value
• at that date is $104M.
• Assume that the cash (and equivalents) of $265M on 29-Jul-04 will have decreased to
• $235M by 31-Dec-05. Treat this as free cash (not needed for working capital).
• Choose a growth rate between 2.5 and 3.5% to compute the terminal value for 2012.
• Assume that the convertible bonds have been converted and the warrants have been
• exercised (shortly) before 31-Dec-05. More specifically, use the following:
• Shares outstanding before the conversions: 262M
• The bonds are converted into $300M $9.13 = 32.86M new shares.
• The warrant exercise creates 18M new shares and generates cash proceeds of 18M $7.33 = $132M for the firm (to be added to the existing free cash).