Topic: DCF analysis finance case study

Questions for Group Assignment
Radio One, Inc.
The purpose of this assignment is to practice DCF analysis and prepare for class discussion on the
Radio One case. Please read the case and answer the following questions. You need to submit a
spreadsheet for parts I‐IV, and a separate document with your typed answers for the remaining
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
    answers are not perfect. You should also be prepared to explain your answers during class
    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

Type of service: Academic paper writing
Type of assignment: Case study
Subject: Finance
Pages/words: 5/1375
Number of sources: 5
Academic level: Undergraduate
Paper format: Chicago
Line spacing: Double
Language style: US English

get a custom essay

Check our prices