Radio one

The rationale of the purchase is to increase Radio One’s foothold in the top 50 “African-American” markets. With this increased foothold in the African-American market Radio One will have more negotiating power when talking with advertisers. With this Radio One will be able to sustain the power ratios they achieved before. More consolidation would significantly decrease expenses by enjoying cost savings from programming syndication and purchasing from vendors, reduction in duplicate staffing in markets where multiple stations were owned, and the creation of national representation agreements.

The risks would include overpaying for companies because of the high demand in the industry, making the purchases a bad investment in the long run. Also another possible risk is that Radio One would spend too much working capital by purchasing these extra stations ($100,000 for each targeted station). There is also the risk of cannibalization from stealing some of the listeners they already have in those markets. Another possible risk is the difficulties in integrating 21 new stations at the same time.

Since we have the projected BCF’s to 2004 we had to project the rest of the BCF’s to 2015; in order to do that we had to make some assumptions about the growth rate of the BCF’s. We calculated the average growth rate for the BCF’s from 2000 to 2004 and then linearly decreased it to 4 percent in 2015. We did this with the assumption that growth would decline every year to a low of 4 percent in 2015. In order to figure out the corporate expenses associated with the new stations we looked to the income statement in 1999 to see what corporate expenses were without the new stations. We then subtracted that number from the $6 million of corporate expense from 1999 the pro-forma, which includes the new stations. Then, after calculating the growth rate for corporate expenses we noticed it was constant at 15 percent, so decided to keep it constant at the 15 percent until 2015 as well. Following all these assumptions we calculated the free cash flows out to 2015.

Based on the information in the case we came to the conclusion that the capital expenditures were going to remain constant at $100,000 per station per year. As a result of this assumption we kept the capital expenditures are $2.1 million until 2015. To come up with the net working capital needed by the new stations we calculated the ratio of the net working capital in 1999 to the revenue in 1999. We then took the ratio and estimated the working capital needed for the 21 new stations based on the revenue from those stations in 2000. After figuring out the increase in working capital for year 2000 we calculated the change in net working capital for each successive year and grew it at the BCF growth rate with the thinking that as the stations grow and expand they would need more working capital.

We thought it best to use the CAPM to estimate