US Cellular 2012 Annual Report Download - page 33

Developed operating market licenses (‘‘built licenses’’)
U.S. Cellular applies the build-out method to estimate the fair values of built licenses. The most
significant assumptions applied for purposes of the November 1, 2012 and 2011 licenses impairment
assessments were as follows:
November 1, November 1,
Key Assumptions 2012 2011
Build-out period ................................. 7 years 7 years
Discount rate ................................... 8.5% 9.0%
Long-term EBITDA margin ......................... 33.9% 32.2%
Long-term capital expenditure requirement (as a % of service
revenue) ..................................... 14.5% 13.0%
Long-term service revenue growth rate ................ 2.0% 2.0%
Customer penetration rates ......................... 13-17% 11-16%
The discount rate used to estimate the fair value of built licenses was based on market participant capital
structures, participant risk profiles, market conditions and risk premium assumptions. The decline from
9.0% in November 2011 to 8.5% in November 2012 primarily reflects the general decline in market
interest rates during that period as well as revised cash flow assumptions based on forecasts of market
participants.
The discount rate used in the valuation of licenses is less than the discount rate used in the valuation of
reporting units for purposes of goodwill impairment testing. That is primarily because the discount rate
used for licenses does not include a company-specific risk premium as a wireless license would not be
subject to such risk.
The discount rate is the most significant assumption used in the build-out method. The discount rate is
estimated based on the overall risk-free interest rate adjusted for industry participant information, such as
a typical capital structure (i.e., debt-equity ratio), the after-tax cost of debt and the cost of equity. The
cost of equity takes into consideration the average risk specific to individual market participants.
The results of the licenses impairment test at November 1, 2012 did not result in the recognition of a loss
on impairment. Given that the fair values of the licenses exceed their respective carrying values, the
discount rate would have to increase to a range of 8.6% to 9.1% to yield estimated fair values of licenses
in the respective units of accounting that equal their respective carrying values at November 1, 2012. An
increase of 10 basis points to the assumed discount rate would cause less than a $6 million impairment
whereas an increase of 50 basis points would cause an impairment of approximately $36 million.
Non-operating market licenses (‘‘unbuilt licenses’’)
For purposes of performing impairment testing of unbuilt licenses, U.S. Cellular prepares estimates of fair
value by reference to prices paid in recent auctions and market transactions where available. If such
information is not available, the fair value of the unbuilt licenses is assumed to have changed by the
same percentage, and in the same direction, that the fair value of built licenses measured using the
build-out method changed during the period. There was no impairment loss recognized related to unbuilt
licenses as a result of the November 1, 2012 licenses impairment test.
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