 # Topic: DCF analysis finance case study

Questions for Group Assignment
The purpose of this assignment is to practice DCF analysis and prepare for class discussion on the
questions.1
Questions:
I. Forecast the incremental FCF in 2001‐2004 from acquiring the 21 new stations. Use the
following hints and assumptions:

1. Broadcast Cash Flow (BCF) is what we refer to as “Revenue ‐ cost” in the textbook
formula for FCF, but it does not include corporate expenses. In other words, EBITDA =
BCF – corporate expenses, and EBIT= BCF – corporate expenses – depreciation and
amortization.
2. Assume future BCF is as projected in Exhibit 9. Since we want to forecast the
incremental FCF, we will focus only on the BCF for the new markets.
3. Assume that the incremental corporate expense for the new stations will be 2% of
BCF.
4. As noted on page 5, each new station will require \$100K of capital expenditure each
year. Assume that these expenditures will be depreciated in equal amounts over five
years, starting in the year in which the capital expenditure occurs.
5. As noted on page 5, assume that Radio One will have to provide the stations with their
initial working capital because the working capital of the targeted stations will not be
sold to Radio One in the proposed assets sale.
6. In addition to the depreciation expense resulting from the new capital expenditures
in part 4, assume that each year beginning in 2001 and ending in 2015, Radio One will
be able to deduct an additional \$90 million as a result of the potential acquisition.
(See footnote b at the bottom of Exhibit 9.)
7. Assume the corporate tax rate is 34%
8. Assume that each year, net working capital for the new stations will be 24% of the net
revenue for the new stations (from Exhibit 9). Remember, when we calculate FCF, we
look at the increase in net working capital.
1
II. Assume the acquisition of the new stations will be all‐equity financed and use the CAPM to
decide on a discount rate. Assume that the risk‐free rate isthe yield on a 10‐year government
bond from Exhibit 10, and that the market risk premium is 7.2%.2 Finally, assume that the
asset beta is 0.82, which is the asset beta of Ratio one (Exhibit 8). The implicit assumption
here isthat the new stations will have similarsensitivity to market risk as Radio One’s existing
station.
III. To calculate a terminal value, assume that after 2014, FCF will grow at a constant rate of 5%.
IV. Finally, calculate the present value of all future FCF (i.e., 2001 to 2004 plus the terminal
value).
Remaining questions
For the remaining questions, you need to provide a separate document with your typed answers.
You will get full credit aslong as you provide thoughtful answers with an explanation, even if your
discussion.
A. How can acquiring the new stations add value to Radio One? What are the potential risks?
(This is the first thing you should think about before conducting the actual DCF analysis.)
B. Based on the DCF analysis above, what price should Radio One offer to acquire the 21
stations?
C. Do you think the constant growth assumption in the DCF analysis above isreasonable? If not,
please suggest an alternative assumption or explain (without doing any further calculations)
how the analysis can be improved.
Remark:
On page 5, the case also discusses how to value the acquisition via multiples. You do not need to
prepare for this at this point, but it might be useful to highlight these two paragraphs for class
discussion. We will also discuss how we can use multiples to estimate a terminal value

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