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Radio One, Inc. Case Solution & Answer

Radio One, Inc. Case Solution

FCF Valuation (For potential market)

In order to analyse the potential benefits of acquiring the new market, the same pattern of free cash flows has been determined to identify the expected value of all the stations. In the particular case, it is identified that the expected figures of earnings before interest and tax would tend to increase at the same pace as for the existing markets. However with the better results of operations, the net value of all the potential markets would be greater than the existing markets.

FCF Valuation (Consolidated market)

After analysing the total value of existing and potential markets, it has been determined that how much the net value from the combination of these two scenarios represents. Therefore, the consolidated results show that the average value of all the stations included in the existing and potential markets would be 5.88 billion in the year of the period.

 In order to value the company, an average multiple of 24.7 has been calculated through analysing the actual trading multiple and expected of 30 times. Thus, the total value shows that it would benefit the Radio One in order to expand the operations globally.

Reduction of corporate expenses

As the net revenues would only increase if the direct level of corporate expenses would tend to decrease over the years. So in order to assess the potential benefit of cost reduction, the projected reduction of corporate expenses has been analysed.

First, it is assumed that the net cost of 3% has been declined over the number of selected years than it is considered that how much the level of impact each component bears due to change in the level of cost.

In the particular case, there are three components that could affect the overall operational activities of the business and would change according to the proposed level of cost reduction. So from the following analysis, it is determined that the average increase in gross revenue in existing market would be 13% due to the fixed reduction of corporate cost.

On the other side, the average increase value of gross revenue for the potential market would be 12.1%. Therefore, it shows that the existing market would benefit more than the new market. The other two components affected by the corporate expenses also shows declining rate under the potential market as compared to the existing market.

 Therefore, the overall analysis shows that the new markets would be quite expensive for the Radio One as compared to the existing market. It also highlighted the average benefits of an old market over the new market. Thus, it is concluded that Radio One should first focus on the existing markets for the acquisition instead of going for the new markets.

Sensitivity analysis

After the thorough study to analyse the difference between the existing and the potential market, it is concluded that following factors would positively or negatively impact the results if the current situation changes overtime. In that case, the key factor for the changing situation would be the direct corporate expenses because it would change the entire figure of the gross revenue, net revenue and the expected level of broadcast cash flows.

From the expected results, two conditions of expenses had been applied in order to assess the impact of three components that would directly affect by the expenses. First, it is conducted to decrease at least 3% of expense in order to know the impact of other components so under the situation; it is determined that all the expected results would tend to increase due to the reduction in the level of direct expenses………………

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