By calculating the stations NPV, Radio One is able to examine the value of the acquiring company. For project forecasting, I used exhibit 9 which got 1,178,171 with the NPV set at 12.2 percent. It increases each year at 6 percent. 6 percent was the reason for optimizing between the middle between 4.8 percent. The price per share is 97 dollars which when multiplied by the share number 16,137,000 the market value is realized at 1.5 billion dollars. From the exhibit, I used a tax rate of 41% in computing the earnings after tax. Also, I used a present value factor of 12.2% in computing the PV and NPV.
Scenario 1: Risk factor
As any other media industry, radio one derives most of its revenue by advertising. Most of radio one stations is free to air and do not collect subscription revenue. Advertising being a discretionary expenditure will be one of the first to be cut in case of an economic downturn. By pruning their advertising budgets, the radio industry is adversely affected.
Most restrictions do not apply to satellite radio broadcasters unlike FM radios. Multiple channel ownership for instance is not allowed within a similar city but satellite broadcasting is not limited by numbers. Current affairs and news cannot be broadcasted 24 hours a day while satellite broadcasters can do this by setting up a dedicated station. FM stations are also limited to a specific geographical location unlike satellite radios whose signal covers the whole country. License fee is not required from satellite broadcasters but FM radio must pay a percentage of their gross revenues as license fees. Satellite broadcasters are treated favorably which has affected the radio industry.
Intense competition between FM radio operators together with digital technological advancements is proving to be a risk factor. FM radios operating within similar cities are scavenging for same listeners, advertisers and similar content. FM radio stations have tremendously increased resulting in an increase in demand for trained personnel which is proportionate. Poaching and attrition have become an ethical and public relations nightmare. Digital Audio broadcast is a digital broadcasting technology that uses FM band. It is increasingly becoming popular worldwide. By effectively utilizing these digital technologies, broadcasting of multiple radio stations with better quality than analog is achieved.
Scenario 2: Management
From the analysis, it is clear that the increase in the amount of corporate expenses as well as the selling, general and administrative expenses from (2.2M, 12.9M) in 1997 to (4.2M, 30.7M) in 1999 significantly affects the operating income. Management is the core factor in the company which accounts for about 40percent of the total expenditure. Ideally, selling, general and administrative expenses take a significant portion of the expenses. In the EBIT(mgnt), the expenses attributed to management operations can be seen to increase the operating expenses and thereby add onto the expenditure budget which when factored into the budget leads to the depletion of cashflows.
Scenario 3: Marketing
Marketing represents a significant portion in the overall total budget and it occupies about 75percent. Radio Ones strategy of intensive marketing will require significant financing. The increase in direct expense as a result of embarking on additional advertising with 30.4M in 2000 and 41M in 2004 not only leads to the increase in the total expenses but also proves quite expensive especially when the company is not generating revenue from the market reached out through advertising. The growth in sales was projected to increase over the years 1999 to 2004. Marketing is essential to the Radio one since it helps popularize the company but when the marketing expenditure is not replenished by additional sales, the organization stands to lose.
The clear channel was an unforeseen growth opportunity for Radio one. Urban stations in the leading markets do not become available easily. The Radio One management has therefore decided to purchase a number of Clear channel stations from leading markets. The eventual larger national footprint will increase advertising revenue and serve as an important platform for the planned expansion of the company and related form of media, cable, internet and recording industry.
To increase the net profits, there is need to cut the cost and expenses. Growth in earnings stand to take effect through effective cost minimization approaches as well as profit maximization objectives. By cutting the advertising costs, Radio One stands to obtain an increase profitability in its portfolio. The management of Radio one should also check that it manages resources well in such a way that it maximizes its profitability.
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