This case involves whether Radio One should purchase the 21 radio stations from Clear Channel, Davis and IBL LLC and the impact of the acquisition to the investors and on the market. Examining the stations it fits with Radio One’s Corporate Strategy and they have the ability to bid first on a group of stations that would double Radio One’s size. Also this purchase would create national coverage for Radio One.
First we must look at the Return on Asset of Radio One. With a Risk Free rate of 6.3% given from Exhibit 10; I am using 30 years because that is the highest and most logical for this particular industry. I calculated the Risk premium from the average of both the AAA and AA Corporate bonds on Exhibit 10; the result was 7.2%. Finally the Asset Beta given in Exhibit 8 of .82 .Thus the Return on the Asset is roughly 12.2%
Calculating the NPV of the stations helps Radio One see if taking on this acquisition is worth the value. Using Exhibit 9 for the project forecasting and continuing on for the said 30 years you get 1,178,171 with the NPV set at 12.2% and each year growing at 6%. The reasoning for 6% is because from optimizing between 4-8%; 6% was in the middle.
What is the market value of Radio One? To find this I took the price per share $97 and multiplied it by the number of shares 16,137,000 getting a market value of $1.5 billion. Now to investigate the WACC of Radio One. Rd = Interest paid of $15.3m over Market Price = $82.6 million = 18.53% Re = CAPM = 6.28 + Beta of .82*7.7 (Using the BBB Corp Bond Rate) =12.44. I propose that Radio One should offer the said price of 1.3 billion for the 21 stations. They should use the payment of the debt of $82 million with the use of current investments available for sale, then use the remainder in the deal for. This would cover the cash portion making the bid attractive because of the balancing of the debt before taking on the acquisition. The remainder of the funds will come from the shares together to create the total of 1.3 billion. Being the first to bet and with this attractive offer Radio One should have the strongest position in the deal and come out with an acquisition that doubles their size and giving them a competitive position in nation wide coverage.