NOVEMBER 26, 2013

VERIZON COMMUNICATIONS ACQUISITION FROM VODAFONE

INVESTMENT ANALYSIS AND RECOMMENDATION

TEAM 3
Vladimir Rusanov Nicholas Antonucci Serge Ngatta Quoc Le

Executive Summary
Verizon Wireless was born 14 years ago as a joint venture when Vodafone Group PLC agreed to merge its US operations with the former Bell Atlantic; now Verizon Communications Inc. As of today, Verizon Wireless is the largest cellphone operator in the US, with Vodafone and Verizon owning 45% and 55% of the company respectively. On September 23rd 2013, Verizon Communications agreed to spend $130 billion to take full control of its enormous wireless business unit from Vodafone. This deal provides Verizon with an opportunity to own 100% of its most profitable business. Verizon will complete the transaction by issuing roughly $70 billion worth of stock to Vodafone shareholders, and paying nearly $60 billion in cash, raised largely through the issuance of bonds. 4 Verizon claims that the deal enhances its ability to provide its customers with seamless and integrated services. As a wholly owned entity, Verizon Wireless will be in a better position to take advantage of the changing competitive dynamics in the market, and to capitalize on the evolution of consumer demand for wireless, video, and broadband services. Also, because Verizon has established control in the wireless unit, the risks involved in integrating the transaction is much lower than if Verizon were to acquire a totally new company with no shared culture, and no synergy. Critics of the deal are focusing their main argument on the value of the deal, arguing that the agreed upon price of $130 billion overvalues the wireless business. Since Verizon is only acquiring 45% of the business at $130 billion, it puts the total value of Verizons Wireless business is at $290 billion. Some also criticize the psychology of the deal; arguing that by borrowing a mountain of cash, and issuing stock valued at nearly half of the companys market cap, Verizon is indeed giving the company away to Vodafone shareholders. For the purpose of this case, we will analyze both the qualitative and quantitative decision making process that Verizons board used to complete the deal. We will attempt to answer whether it make sense for Verizon to effectively pursue this asset investment decision and we will look at the valuation criteria and discuss strengths and weaknesses. We will look at the relevant cash flows involved in the deal to determine the NPV and other capital budgeting measures of value. Then, we will conclude with a discussion on the risk and reward trade-off for shareholder. Lastly, we will conclude with a recommendation as to whether or not Verizons board should agree to the deal. We will consider all quantitative analysis as well as discuss the qualitative issues associated with the deal in making our recommendation.

Quantitative Analysis
Logical Steps to Decision Making:
1. Starting with determining the Beta for the Verizon Wireless business unit, we begin with competitors T-Mobile and Sprints betas as we do not have the beta of Verizons wireless business alone. Because both companies receive most of their revenues from wireless operations, these seem to be a good proxy for estimating Verizons wireless beta. After averaging these betas, we will use each companys debt to equity ratio to end at the unlevered beta for the mobile business unit of Verizon Communications Inc (VZ). 2. Then, we will re-lever the average Beta we found in the previous step using Verizon Communications Inc.s D/E ratio. Since we were unable to establish the capital structure of Verizon Wireless as a standalone unit, we assume that the debt-to-equity ratio of Verizon Communications is consistent across all of its business units. 3. From the levered Beta calculation, we can find Verizon Wireless cost of equity using the CAPM model. 4. Once we have Verizon Wireless cost of equity, we will be able to compute the weighted average cost of capital (WACC) which would be our required rate of return (RRR) for Verizon Wireless. 5. In order to calculate the NPV, we need to estimate the future operating cash flows. To do this, we will apply a growth rate 0f 7.09% through the first five years following the deal and assume a terminal growth rate of 2.50% thereafter. Upon having projected cash flows for 5 years and RRR, we can find the NPV for the first 5 years. 6. Next, we will find Verizon Wireless terminal value assuming future cash flow as a perpetuity with the 2.5% growth rate consisting of inflation and an estimated rate of population growth to account for subscriber growth. 7. We will then discount the terminal value to today (Jan 1st 2014), when the deal would be finalized, and add it to the NPV of the first 5 years. From there, we will take 45% of the total NPV and compare it to $130 billion that Verizon Communications Inc. would pay to Vodafone. 8. Since we already have the relevant cash flows, we can take 45% of each years operating cash flow to compute the Payback period, however our decision will be based on our NPV and IRR calculations. 9. Lastly, we will conduct a sensitivity analysis to test the effects of our various assumptions on our end result and recommendation.

Market Data Discovery

In order to determine if the asset investment decision makes sense for Verizon, we relied on capital budgeting techniques such as NPV and IRR for measuring value. Therefore, we focused on determining the discount rate and relevant cash flows necessary to compute NPV and IRR. Most articles we read broke the financing of the $130 billion deal into $70 billion in equity and $60 billion in debt. Other than these two figures, there was limited data available to value the deal. We had to be resourceful and draw our information from the available analyst reports and make some of our own assumptions. Sites like Yahoo Finance, Bloomberg, and Value Line were very helpful in conducting our research (Appendix A). From these sources, we were able to get the income statement for Verizon for the past 10 years. The income statement breaks down each line item by business unit, therefore, giving us relevant data for the Verizon Wireless business unit.

Assumptions
Risk-free Rate: Since we went back 10 years in our derivation of Verizon Beta and projected 10years of cash flows for the project, we used the yield on the ten-year Treasury bond as our riskfree rate. We believe it accurately represents the risk-free rate over the life of the investment. Our risk-free rate is 2.86% 3 as can be seen in Appendix A. Market Return: Because we are using the Russell 3000 as a proxy for the market, we found the annualized returns of the index going back 10 years to determine the appropriate market return in our calculations. Our market return is 7.90% 3 as shown in Appendix A. Market Risk Premium: Once we determined the risk-free rate and market return that we would use, computing the market risk premium becomes a simple subtraction of the risk-free rate from the market return. The market risk premium we used was 5.04% as shown in Appendix A. Marginal Tax Rate: We were able to pull this data from the latest financial report of Verizon Communications Inc. That value is 35% 4 as shown in Appendix A. Debt-to-equity Ratio of Verizon Wireless: Using the latest available financial report from Verizon Communications Inc., we were able to compute the companys debt-to-equity ratio before the acquisition. Because we were unable to find the capital structure for the wireless business alone, we assumed that the capital structure is the same for the Verizon Wireless business unit. That value is 36.6% 4 as shown in Appendix A. Competitors: In order to properly evaluate the attributes of the wireless business unit of Verizon, we needed to compare those attributes to other companies that had mostly wireless operations. We chose Sprint and T-Mobile because these 2 companies derived most of their revenues from wireless operations. Matter-of-factly, T-Mobile is a 100% wireless operation and
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Sprint, more than 90% 3. Once we selected our competitors, we used a combination of resources to find the companys betas, debt-to-equity ratios, and marginal tax rates. Please refer to these figures in Appendix A.

Transaction Multiples in M&A

The value of anything being sold is what someone is willing to pay for it. However, when it comes to a business, there are several methods that are accepted. It is a common valuation practice in mergers and acquisitions (M&A) to look at transaction multiples. These could be multiples of revenue, multiples of cash flows, or even multiples of subscribers to a service business etc. Multiples of EBITDA is the most common way to estimate the relative value of a transaction because EBITDA is a very good proxy for relevant operating cash flows within a business excluding accounting decisions. In our case analysis, we are going to look at the multiples of EBITDA and revenues for the Verizon Wireless transaction, and compare it to similar industry transactions, as a gauge to the magnitude of the deal.

Comparable Transactions (Sprint Softbank & Peer Median)

The Verizon Wireless deal is not an isolated event. The telecom industry has been going through major consolidation of its biggest players. This year alone, Sprint PCS, the 4th biggest wireless carrier in the country was acquired by Softbank in a deal to re-invigorate its struggling operations as it was shedding market share to the competition. Also, T-Mobile and Metro PCS, respectively the 3rd and 5th biggest wireless service providers in the country in terms of subscribers, have agreed to a full merger in order to remain competitive. In light of these events, it actually makes sense for Verizon Communications Inc. to fully acquire its Wireless operations as it is the number one wireless provider in a country. 2

Calculations
Cash Flows
To come up with the appropriate operating cash flows, we estimated operating cash flows of Verizons wireless division for the next 5 years, starting in 2014. We assumed that the operating cash flows would be growing 7.09%3 every year for the first 5 years. After that, the cash flows would grow at the rate equal to 2.5% which is the sum of the Fed Reserves projected inflation rate of 1.73% and average population growth of 0.77% (refer to Appendix N). Since we do not have the operating cash flows in 2013, based on the financial data of Verizon in 2012, we came up with the estimated appropriate cash flow in 2013 by applying the 7.09% growth rate 3 . After that we again applied the same growth rate for the next 5 years, starting in 2014 and ending in 2018, and found the present value of yearly operating cash flows to be approximately $24.96 billion and $32.83 billion respectively.
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Beginning in 2019, we applied the growth perpetuity to come up with the terminal value which is $1.213 trillion. The terminal value is the present value at a future point in time accounting for all future cash flows that we expect to receive forever as the business is a going concern (refer to Appendix D). Note: the discount rate or WACC that we used to derive our net present value of all future operating cash flows in Appendix D will be explained in later sections.

Betas:
We derived the unlevered beta of the wireless business by using the average beta of two peers, T-Mobile and Sprint of whom we assumed wireless accounts for 100% of revenue and assets of the two businesses. We came up with the unlevered beta of Verizons wireless business to be approximately 0.6. Please refer to Appendix E for details. By applying the formula to re-lever the beta (shown below), we found the levered beta of Verizon wireless to be approximately 0.74. We noticed that the beta for whole company of 0.668 is lower than 0.74 calculated for just the wireless business which indicates that the wire-line business has been more stable historically in comparison to the wireless business. Please refer to Appendix E for details.

Cost of Equity:
We used the CAPM model to derive the cost of equity, E(r )=r + (E(r ) r )
Equity f Equity M f

The risk-free rate used is 2.86% based on the yield of the 10-Year Treasury as of 9/3/2013 3. Again, we used this as it accurately represents the risk-free rate over the life of the investment until terminal value. The corresponding market return used was 7.90% which is the annualized return of the Russell 3000 from 10/31/2003 to 10/31/2013 3. Our result showed that the cost of Verizon wireless equity will be equal to approximately 6.59%. Please refer to Appendix F for details.

Cost of Debt
To calculate the cost of debt, we converted the debt issued by Verizon Wireless to market values and used a weighted average yield to maturity. We calculated the cost of debt for Verizon wireless to be 2.57%. Please refer to Appendix G for details.
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Weighted Average Cost of Capital (WACC):

WACC: r = (% debt)(r )(1 T ) + (% equity)(r )
a d c e

By applying the WACC formula with data derived earlier, we found the Weighted Average Cost of Capital to be 5.28%. Please refer to Appendix H for details.

IRR:
Since we already projected all the appropriate operating cash flows, by running the what- if analysis in excel, we found the IRR equal to approximately 12.42% which is the rate making the projects NPV equal to zero.

NPV:
The net present value is the difference between the present value of cash inflows and the initial cash outflow. As we mentioned in the cash flow analysis, the present value of the 45% stake will be about $477.138 billion. Since the initial investment was $130 billion, the NPV of the acquisition equals $347.138 billion ($477.138 billion -$130 billion) (refer to Appendix D).

Market Multiple Comparisons:

Upon completing the calculations of NPV and the relevant cash flows that were used, we felt it would be beneficial to compare the terms of the deal to historical transactions of a similar nature in order to verify that the premium paid is not excessive. In doing so, we found that Verizon Communications purchased the remaining 45% stake in Verizon Wireless for a value that was 9.72 times 2013 EBITDA 3. This was very comparable to both the Softbank acquisition of Sprint (9.72 times EBITDA) 3 and the peer median of 9.02 times EBITDA. We also made the comparison on a transaction value to revenue basis as well which showed that Verizon Communications was paying 3.81 times 2013 revenue 3 . While this was considerably higher than the 1.31 factor paid in the Sprint deal 3, it was only slightly higher than the peer median of 3.17. 3 Also the Sprint deal was different because the company was acquired while struggling, whereas, Verizon Wireless is being acquired in its prime. Please refer to Appendix I.

Sensitivity Analysis:
In order to analyze how a change in certain variables would affect our final decision, we decided to run sensitivity analysis. We chose certain variables that reflected situations where assumptions had to be made. This allowed us to see whether or not a deviation in our assumption would have a significant impact on our calculations, and therefore our decision. The first variables that we analyzed in relation the WACC were the debt to equity ratio and riskfree rate (Appendix J). We provided three options for the risk-free rate which consisted of a 5-year, 106

year, and 30-year maturity. We compared these rates to various debt-to-equity ratios from 0 to 135% including the 36.6% which is Verizon Communications current debt to equity ratio 1 before any acquisition. Then, we capped our range at 135% as this was the average debt to equity for Sprint and TMobile, two of Verizon Wireless peers. 3 The base case we used in this analysis was the ten-year Treasury bond and a debt to equity ratio of 36.6%. What we determined from this first analysis is that the higher the debt to equity ratio, the lower the WACC was. When analyzing the risk free rates, we used a corresponding market risk premium in the WACC calculation. This analysis was used to provide us with an idea of a reasonable range of WACC which we could expect to see and use for further analysis. Next, we decided to see how various WACCs and short-term growth rates (first five years of the project) affected the net present value of the decision (Appendix K). Our base case assumed a WACC of 5.28%, which is what our calculation was, and our Bloomberg provided growth rate of 7.09% 3. In only one case of our analysis, we found a negative NPV that would suggest not making the asset investment decision. This occurred then the WACC was 10% and the short-term growth rate was zero. It seems that when the WACC exceeds 10% and there isnt sufficient growth in the relevant cash flows, a negative NPV is a possible outcome. The best case scenario in our analysis was the lowest WACC combined with the highest short-term growth rate. We also ran analysis on the how the terminal value growth rate and the WACC would affect the net present value of the decision (Appendix L). Our base case in this situation assumes a terminal value growth rate of 2.50% and WACC of 5.28%. There were three scenarios that resulted in a negative NPV. When WACC was equal to or below 5.63%, there were no instances of negative NPV. In reference to the terminal value growth rate, there were no instances of negative NPV when the growth rate was greater than or equal to zero. The best case scenario in our analysis occurred when the WACC was at its lowest and the terminal growth rate was at its highest. Our final two sensitivity analyses incorporated the growth rate for the first five years following the investment and the terminal growth rate for the subsequent years through infinity. We analyzed these variables and how they affect both IRR and NPV (Appendix M). In both the IRR and NPV tables, there were three occurrences where the IRR was lower than our WACC which directly corresponded to those occurrences where a negative NPV resulted as we expected. The highest IRR and NPV occurred when the short-term growth rate and terminal value growth rate were both at their highest. No big surprise here.

Qualitative Discussion
The acquisition would enable Verizon to become the premier wireless provider in the U.S, stay competitive and enhance value across platforms. This transaction has to be signed either now or never, since interest rates are rising and Verizons financial performance has not met shareholders expectations for the last couple of years. Furthermore, competition becomes fiercer. There have been quite a few mergers and acquisitions in the telecommunication industry, such as the Sprint and Softbank
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acquisition and T-Mobile and Metro PCS merger. Getting together or selling out is a better way for carriers to compete in this highly competitive industry. 4

Risks:
There is a possibility that the U.S Department of Justice (DOJ) is going to block Verizon and Vodafone acquisition like the DOJ already did to an AT&T and T-Mobile deal in the past. The transaction could be blocked if the DOJ deems it will hinder competitiveness of the marketplace and the block will best serve the public interest as a whole. 4 Both Verizon and Vodafone have made commitments with respect to itself and the wireless transaction. The Stock Purchase Agreement states that both Verizon and Vodafone will assure the other for certain losses based on assumptions. The closing of the Wireless Transaction is subject to certain conditions including the approval by the shareholders of both Verizon and Vodafone and approval by the Federal Communications Commission. 4 The Stock Purchase Agreement contains certain termination rights for each of Verizon and Vodafone, which if exercised will result in termination fees or expense reimbursement. Verizon must pay to Vodafone a termination fee of $1.55 billion in the event of termination by either party as a result of Verizons failure to obtain shareholder approval of the share issuance, $4.65 billion in the event of termination by Vodafone as a result of a change of recommendation of the Verizon Board of Directors or $10.0 billion in the event of a termination by Vodafone as a result of a financing failure. Vodafone must pay a termination fee of $1.55 billion in the event of a termination by either party as a result of failure to obtain Vodafone shareholder approval of the Vodafone sale resolutions. If the Stock Purchase Agreement is terminated by either party for a material incurable or uncured breach, the breaching party must reimburse the terminating partys out-of-pocket expenses up to $1.55 billion. 4 The FCC regulates several aspects of Verizon Wireless operation. Generally, the FCC has jurisdiction over the construction, operation, acquisition, and transfer of wireless communications systems. Verizon Wireless anticipates that it will need additional spectrum to meet future demand. It can meet spectrum needs by purchasing licenses or leasing spectrum from others, or by participating in a competitive bidding process for new spectrum from the FCC. Today, Verizon Wireless holds FCC spectrum licenses that allow it to provide a wide range of mobile and fixed communications services, including both voice and data services. FCC spectrum licenses typically have a term of 10 years, at which time they are subject to renewal. While the FCC has routinely renewed all of Verizon Wireless licenses, challenges could be raised in the future. If a wireless license were to be revoked or not renewed, Verizon Wireless would lose that spectrum. The FCC has also imposed certain specific mandates on wireless carriers including construction and geographic coverage requirements, technical operating standards, provision of enhanced 911 services, roaming obligations, and requirements for wireless tower and antenna facilities. 4
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Competition and Maturing of the US Market

VZ face significant competition in its industry. The rapid development of new technologies, services and products has eliminated many of the traditional distinctions between wireless, cable, Internet, local and long distance communication services and brought new competitors to the markets, including other telephone companies, cable companies, wireless service providers, satellite providers, application and device providers, electric utilities and providers of voice over Internet protocol (VoIP) services. While these changes have enabled VZ to offer new types of services, they have also allowed other service providers to broaden the scope of their own competitive offerings. VZ ability to compete effectively will depend on network quality, capacity and coverage, the pricing of services and equipment, the quality of customer service, development of new and enhanced products and services, the reach and quality of sales and distribution channels and capital resources. It will also depend on how successfully VZ anticipate and responds to various factors affecting the industry, including new technologies and business models as well as changes in consumer preferences and demand for existing services, demographic trends and economic conditions. If VZ is not able to respond successfully to these competitive challenges, VZ could lose market share and experience reduced profits.4

Conclusion and Recommendation

Based on the quantitative financial analysis we performed which yielded a positive net present value of $347.138 billion and an IRR that is greater than our estimated WACC (12.42%>5.28) we recommend that Verizon Communications Inc. move forward with the acquisition of the 45% of Verizon Wireless owned by Vodafone. The deal appears to be beneficial for the companys financial perspective. Considering the qualitative issues mentioned above, Verizon Communications Inc. has to consider all of the pros and cons of the acquisition. Although, these factors are relevant to a decision, they are difficult to measure in terms of numbers. Some qualitative aspects could weigh heavily and affect the outcome of the decision. As a result, the firm has to balance out between advantages and disadvantages. In our opinion, considering the telecommunication industry situation as a whole, despite the risks involved, we recommend that Verizon Communications Inc. acquire the 45% of Verizon Wireless at the price of $130 billion.

Appendix A: Market Data Discovery

Market Data Discovery Beta T-Mobile US = D/E T-Mobile US = Tax Rate T-Mobile US = Beta Sprint = D/E Sprint = Tax Rate Sprint = Risk Free Rate = Market Return = D/E Verizon Communication (Before Acquisition)= Tax Rate Verizon Wireless = Short Term Growth Rate Verizon Wireless = 1.1 141.70% 36.00% 1.17 126.69% 30.00% 2.86% 7.90% 36.60% 35.00% 7.09% Bloomberg Yahoo Finance Value Line Bloomberg Yahoo Finance Value Line Yield on the 10-Year Treasury as of 9/3/2013. Annualized return of the Russell 3000 from 10/31/2003 to 10/31/2013. VZ Report Value Line Bloomberg Sources

Appendix B: Verizon Wireless Operating Income in the last 10 years ($million) For the Period Ending Operating Income VZ Wireless Op Inc.

2012 $21,006 $21,768

2011 $18,834 $18,527

2010 $14,645 $18,724

2009 $15,978 $16,638

2008 $18,067 $13,994

2007 $16,471 $11,795

2006 $14,151 $9,600

2005 $12,172 $7,380

2004 $11,844 $5,838

2003 $13,515 $4,084

Appendix C: Verizon Wireless Future Operating Income Cash Flows

Field 45% of Cash Flow Discounted Op. Inc. VZ Wireless Op Inc. 2023 $10,165 $22,589 $37,148 2022 $10,423 $23,162 $36,242 2021 $10,687 $23,750 $35,358 2020 $10,959 $24,352 $34,495 2019 $11,237 $24,970 $33,654 2018 $11,522 $25,603 $32,833 2017 $11,307 $25,128 $30,659 2016 $11,097 $24,661 $28,630 2015 $10,891 $24,202 $26,734 2014 $10,689 $23,753 $24,964 $22,180 $23,311 2013

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Appendix D: Cash Flows in Billions Terminal Value 2019 33.65 1213.18 422.21

2012 21.77

Relevant Cash Flow Table 2013 2014 2015 2016 23.31 24.96 26.73 28.63

Cash Outflow (130.00) 45% discounted CF => 45% discounted CF =>

10.67 477.138

10.86

11.04

2017 2018 + 30.66 32.82 Terminal Value on 1/1/2019 = 11.23 11.43 +

NPV deal total = Cash outflow + 45% NPV of Cash inflows = $347.138 To determine the IRR we have to find the discount rate that makes the NPV 0. IRR = 12.42%

Appendix E: Determine L Verizon Wireless Calculate Beta unlevered for Peers (Mobile companies) U = L / (1+(1-Tc)D/E) TMeasure Mobile Sprint % of Revenues from Wireless 100.00% 90.16% Levered Beta 1.10 1.17 Tax Rate (Tc) 36% 30% Debt to Equity Ratio 141.70% 126.69% u Wireless 0.58 0.62 u Average Peers 0.60

Calculate Beta levered for Verizon Wireless L VW = (1+(1-Tc)*D/E)* U wireless u Wireless VW Tax Rate VW D/E Ratio L Verizon Wireless

0.60 0.35 0.37 0.74

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Appendix F: Cost of Equity Using CAPM

Calculate Verizon Wireless Cost Of Equity CAPM Re vw = Rf+ L vw (Rm-Rf) Risk Free Rate Market Return L Verizon Wireless CAPM 2.86% 7.90% 0.74 6.59%

Appendix G: Cost of Debt (YTM) Amt Issued (MM) mln $2,250 $500 $600 $2,250 $2,250 $700 $300 $300 BB Rtg AAAAAAAACoupon 8.5 8.75 8.875 8.5 8.5 7.875 6.8 7 Maturity 11/15/2018 12/18/2015 12/18/2018 11/15/2018 11/15/2018 7/1/2032 5/1/2029 3/15/2016 Ask Px $128.61 $116.27 $129.83 $128.60 $128.60 $132.11 $116.21 $113.23 Market Value (mln) $2,893.73 $581.35 $778.98 $2,893.52 $2,893.52 $924.75 $348.64 $339.69 Yield to Maturity
Wtd YTM

2.36 0.586% 0.75 0.037% 2.52 0.168% 2.36 0.587% 2.36 0.587% 5.17 0.410% 5.25 0.157% 1.15 0.034% Cost of Debt =

2.566%

Appendix H: Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital WACC (RRR) WACC = (% Debt)(Rd)(1-Tc)+(% Equity)(Re) % Debt 26.79% % Equity 73.21% Cost of Debt Rd 2.566% Cost Of Equity Re 6.59% VW Tax Rate Tc 35.00% WACC (RRR) 5.28%

Appendix I: Transaction Multiples

Transaction Verizon Wireless Sprint Softbank Peer Median 12 Transaction Value/EBITDA 9.72 9.72 9.02 Transaction Value/Revenue 3.81 1.32 3.17

Appendix J: WACC Sensitivity Analysis WACC Sensitivity Analysis Risk-Free Rate Debt/ Equity 5Year 1.34% 4.99% 4.83% 4.73% 4.56% 4.44% 10Year 2.86% 5.82% 5.47% 5.28% 4.87% 4.59% 30Year 3.82% 6.12% 5.63% 5.33% 4.81% 4.43%

0.00% 20.00% 36.60% 80.00% 135.00%

Appendix K: Net Present Value versus WACCs and Short-Term Growth Rates Net Present Value of Project (Millions) First 5-Year growth rate 2.50% 5.00% 7.09% $556,100.00 $666,210.00 $757,147.00 $403,238.00 $483,590.00 $558,375.00 $240,784.00 $295,906.00 $347,138.00 $198,801.00 $247,410.00 $292,598.00 $154,295.00 $196,003.00 $234,758.00 $7,220.00 $26,220.00 $43,810.00

WACC 4.00% 4.43% 5.28% 5.63% 6.12% 10.00%

0.00% $463,778.00 $331,948.00 $191,831.00 $155,616.00 $117,219.00 -$9,742.00

9.00% $854,287.00 $633,291.00 $398,483.00 $337,821.00 $273,529.00 $61,356.00

11.00% $965,425.00 $718,974.00 $457,139.00 $389,500.00 $317,818.00 $81,344.00

Appendix L: Net Present Value versus WACCs and Terminal Value Growth Rates
Net Present Value of Project (Millions)
Terminal Value Growth Rate WACC -8.00% $20,418.00 $14,644.00 $4,401.00 $502.75 -$128,142.00 -$34,678.00 -2.50% $109,473.00 $93,964.00 $68,485.00 $59,407.00 $48,081.00 -$10,010.00 0.00% $230,912.00 $195,128.00 $141,570.75 $124,228.00 $103,291.00 $10,172.00 2.50% $757,147.00 $558,375.00 $347,138.00 $292,598.00 $234,758.00 $43,810.00 3.50% $2,441,100.00 $1,250,498.00 $589,444.00 $470,610.00 $357,594.00 $64,510.00

4.00% 4.43% 5.28% 5.63% 6.12% 10.00%

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Appendix M: IRR Calculation and Net Present Value

IRR Calculation Terminal Value Growth Rate 5y Gr Rate 0.00% 2.50% 5.00% 7.09% 9.00% 11.00% -8.00% 1.84% 3.11% 4.47% 5.68% 6.83% 8.08% -2.50% 5.69% 6.81% 8.02% 9.10% 10.13% 11.27% 0.00% 7.54% 8.59% 9.73% 10.75% 11.73% 12.82% 2.50% 9.43% 10.42% 11.49% 12.42% 13.39% 14.42% 3.50% 10.20% 11.16% 12.21% 13.15% 14.07% 15.08%

Net Present Value of Project (Millions)

Terminal Value Growth Rate 5y Gr Rate 0.00% 2.50% 5.00% 7.09% 9.00% 11.00% -8.00% -$35,417.00 -$22,754.00 -$8,628.00 $4,407.00 $17,365.00 $32,090.00 -2.50% $7,071.00 $26,519.92 $48,311.00 $68,490.00 $88,622.00 $111,561.00 0.00% $55,670.00 $82,879.00 $113,437.00 $141,793.00 $170,127.00 $202,461.00 2.50% $191,808.00 $240,758.00 $295,876.00 $347,138.00 $398,445.00 $457,096.00 3.50% $353,592.00 $428,377.00 $512,681.00 $591,154.00 $669,772.00 $759,698.00

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Appendix N: Expected Inflation and Population Growth Rate

Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Population 321,363 323,849 326,348 328,857 331,375 333,896 336,416 338,930 341,436 343,929

Numeric change 2,471 2,486 2,499 2,510 2,517 2,521 2,520 2,515 2,506 2,493

Percent change 0.77 0.77 0.77 0.77 0.77 0.76 0.75 0.75 0.74 0.73

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Works Cited 1. Yahoo! Finance." Yahoo! Finance. N.p., n.d. Web. 23 Nov. 2013. 2. Value Line - The Most Trusted Name in Investment Research. N.p., n.d. Web. 23 Nov. 2013. 3. "Bloomberg." Bloomberg.com. Bloomberg, n.d. Web. 23 Nov. 2013. 4. Annual Report from a Company Website
Verizon Communications. (2013). Form 10-Q. Retrieved from http://www.verizon.com/investor/secfiling.htm

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