US Cellular 2013 Annual Report Download - page 31

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United States Cellular Corporation
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2013 and 2012 licenses impairment
assessments were as follows:
November 1, November 1,
Key Assumptions 2013 2012
Build-out period ................................. 5 years 7 years
Discount rate ................................... 8.5% 8.5%
Terminal revenue growth rate ....................... 2.0% 2.0%
Terminal capital expenditures as a percentage of revenue . . . 13.6% 13.2%
Customer penetration rates ......................... 12.5-16.7% 13.3-17.3%
The shorter build-out period in 2013 reflects a change in management’s expectations of the time required
to build out the U.S. Cellular network and is based on recent company-specific experience and industry
observation.
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. 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.
As of November 1, 2013, the fair values of the built licenses units of accounting exceeded their
respective carrying values by amounts ranging from 33.8% to 75.9%. Therefore, no impairment of
Licenses existed. Given that the fair values of the licenses exceed their respective carrying values, the
discount rate would have to increase to a range of 8.9% to 9.5% to yield estimated fair values of licenses
in the respective units of accounting that equal their respective carrying values at November 1, 2013. An
increase of 50 basis points to the assumed discount rate would cause an impairment of approximately
$7 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, 2013 licenses impairment test.
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