Laura Martin: Real Options And Cable Industry Solution Case Study Solution
Incorporating Stealth Tier in DCF Analysis
Considering the Stealth Tier, it does not provide any historical figures on the basis of which we can estimate the future possible cash flows; therefore in order to incorporate the stealth tier in DCF analysis, potential cash flows from this unused cable capacity should be derived. According to the Credit Suisse report, the stealth tier will be able to produce around $13 to $169 per home. Given the wide range of possible cash flows, an average price needs to be derived to ascertain future cash flows from this sector, or probabilities can be applied to the future possible cash flows, which will then be discounted back to their present value.
Probabilities can be applied to the values derived through the report of Credit Suisse in such a way that it can assume that there is 30% probability to generate as low as $13 per home, whereas 70% probability can be assigned to generate $100 to $169 per home. This way future cash flow can be assumed and incorporated in the DCF valuation.
Purchase Cox Communications on the footing of her analysis
Considering the analysis performed by Laura Martin, it would be in the best interest to purchase Cox Communications, since according to her; the risk of the industry will be decreasing due to the changing dynamics of the industry and the promising returns that it will yield. Her analysis also states that the gross margins of the company will increase to 50% from 5%, when company switches toward stealth tier. It has also been suggested by her that the company will shift towards providing digital services in the industry, which will diversify the revenue streams of the company.
It is worth to be noticed that the assumptions declared by her about the decreasing capital expenditures with increasing revenues due to the shift towards digital services, which does not only portray a positive outlook of the company but also identifies the decreasing business and financial risk that the company encounters.
All of these promising estimates assure that the revenues will be generated by a huge margin by this company in near future; however, potential risks also exist in the stealth tier due to high uncertainty of future cash flows. Due to the low cost of digital services, potential competition may build up in the industry; therefore, such considerations should also be put in place before making any decision. But still considering the huge potential that exists in the industry, it is worth buying Cox Communications on the analysis carried out by Martin.........
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