Radio One, Inc. Case Solution
Based on these the equity beta for Radio One has been calculated to be around 0.7. Lastly, the credit rating of the company has been assumed to be A, and therefore the cost of debt used is 7.35%. Based on this information, the weighted average cost of capital for the company has been calculated to be around 11%.
Moreover, the free cash flows have been estimated from 2001 to 2004 based on the projections made by the owner of Radio One. The forecasted cash flows for the new markets that are to be acquired have been taken and based on the ratios of 30.75% and 84% the corporate expenses and the depreciation and amortization expenses have been deducted and synergies added. Tax has then been deducted at 35% to calculate the net income and then depreciation has been added back as a non-cash expense. The incremental working capital would be zero and the capital expenditure for 21 stations has been deducted for each of the years to calculate the free cash flow.
Lastly, the terminal value has been calculated for the new market based on the average BCF multiple of 18.1 of all the comparable companies. Furthermore, the terminal value and the free cash flows have been discounted to calculate the 21 radio stations value of $ 1506 million. The value of each radio station is $71.70 million.
The valuation with the FTE is calculated by using the cost of equity as a discount rate and the total value under the method is $1427 million with each radio station value at $68 million.
Through the APV method, the valuation of the stations will be higher bec
ause of the number of tax shields. The value of the stations will be $5558 million with each radio station at $265 million.
The trading comparable analysis has been performed for the company based on the multiples of the industry and the multiples of Radio One. Three multiples have been used to estimate the value of the company. These three multiples are BCF multiple, EBITDA multiple and the After-tax cash flow multiple. In order to calculate the values of the 21 radio stations, the values of the assets for the year 2001 have been used. This is because unlike the discounted cash flow method approach, the comparable trading method calculates the current values for the companies.
Based on the BCF, EBITDA and After-tax cash flow for the 21 radio stations, the valuations have been calculated to be around $ 1242 million, $ 1294 million and $ 1736 million. Similarly, the multiples for Radio One have then been used to value the radio stations and these figures are $ 1689 million, 1798 million and $ 2692 million. Therefore, based on the comparable trading method, the range for the valuation of the 21 radio stations of Clear Channel Communications is from $ 1242 million to $ 2636 million. One important thing to note here is that the multiples have been used from exhibit 8; however, the multiples of Hispanic Broadcasting have been excluded only due to their huge size as compared to all the other comparable companies.
30X BCF is giving the value $1.95 billion, as a result the price is very high as compared to the DCF methods and Radio One should not pay such huge price to acquire the radio stations.Moreover, the price per station would be around $92 million.
Radio One Offer:
The value of the stations is different with the each valuation model. In order to decide the best price for the stations, Radio One should also analyze the amount of consideration paid by the other companies to acquire the similar stations.
The value of per station with the DCF WACC is $71.4 million, $67.9 million with FTE method and $264 million with APV method. ………………………
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