1. The BCF taken from Exhibit 9 for new markets.
2. Corporate expenses assumed at 5% of incremental BCF. It is expected that corporate expenses will not increase significantly with the new acquisition since Radio One already has centralized functions which can handle the new acquisitions. 3. Working capital taken as 25% of net revenues. The working capital percentage has been declining and was 22% in 1999. 25% is average of 1998 and 1999. 4. Capital expenditure is given as $100 per station
5. The depreciation tax shield is calculated for $1,200 per year depreciated for 5 years. For years beyond 2004, the PV of all tax shield is added together. For terminal value, a growth rate of 5% is assumed.
6. Risk free rate is 30 years T-bond, average asset beta is 0.75 and the market risk premium is taken as 7.2%. This gives the discounting rate as 11.75%
The amount to be paid comes to $1.277 billion
What price should Radio One offer based upon a trading multiples analysis?
Based on multiples, the valuation comes to $1. 398 billion ( 21.5 X 2000 BCF) and $1.256 billion ( 19.4 X 2000 EBITDA).
Given that Radio One’s stock price is 30X BCF, can if afford to offer as much as 30X BCF for the new stations?
30X BCF would give a value of 30 X 65,041 = $1.951 billion. This amount is too high in relation to DCF calculations and in relation to multiple valuation. Radio One should not offer such high valuation.
What should Radio One offer for the new stations?
As per the calculations, the value comes to
DCF – 1.277 billion/21 stations = $60.8 million
BCF multiple - $1.398 billion/21 = $66.57 million
EBITDA multiple - $1.256 billion/12 = $59.81 million
Infinity paid 1,400/18 = $78 million per station and Cox paid 380/7 = $54 million per station. Based on the above calculations, the price is between the range of $54 million and $78 million. So Radio One should start at the lower end of the range at say $60 million and be prepared to go up to...
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