Case Study: Radio One, Inc. Essay

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Case Study: Radio One, Inc. - Part A Corporate Valuation Date: 21-09-2009 Instructor: Dr. Oliver Spalt Course: 323058 Corporate Valuation Faculty Economics and Business Administration, Tilburg University P.W. Segers J.J.T.M. Zegers 779710 722085 1. Radio One’s opportunities and risks with respect to their acquisition policy We have identified four main benefits and five major risks with respect to the desired acquisition of 12 urban stations along with the nine stations in Charlotte, Augusta and Indianapolis. Potential benefits: 1. After the acquisition of the 12 urban stations, Radio One becomes the market leader in the African-American segment. The market leader is usually the most attractive negotiator for advertisement…show more content…
We assume this ratio to be constant in the future. We did the same for depreciation and amortization. Further, we assume a tax rate of 35%, a growth rate after 2004 of 2% forever, a market risk premium of 5% and a company rating for Radio One of A. The first step in the calculation process is to determine the Firm Free Cash Flows (FFCF) between 2001 and 2004 (the planning period) for the potential radio stations. The exact calculations can be found in appendix 2.1. The second step is to determine the cost of capital. First, we determine the market weights for debt and equity. We assume that the long term debt is interest bearing. Secondly, we transformed the Asset Beta –given in exhibit 8- into the Equity Beta. We did this by subtracting the ‘Beta of debt’ times the ‘debt to value ratio’ from the ‘assets Beta’. We multiplied this number by the risk premium and added the risk free rate for 30 years. This number is the cost of equity, which is 10.2%. Since we assume the company is A rated, the cost of debt after tax is 7.34% times (1-0.35) = 4.77%. When we multiply the cost of equity by the market weight of equity and add the cost of equity times the market weight of equity we have calculated the (weighted average) cost of capital for Radio One. This gives 9.09%. The third step is to determine the terminal value after 2004. The Gordon Growth Model is suitable for such kind of
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