Financial Forecasting, Case Study Example

Introduction

Radio One, Inc is a radio group which is known for its demographic of targeting African-Americans in the country. It is the largest radio station which targets this group, and it has achieved much success through the purchasing of other radio stations which were underperforming. The station would change their formats and use the stations purchased to cut down on unnecessary costs. The radio station was founded by Catherine Hughes; she had acquired knowledge on the radio business whilst teaching at Howard University. Hughes and her husband bought WOL-AM through raising money, this cost them just a bit under $1 million in the year 1980. Hughes had changed the format of the radio station from playing R&B music and being about public affairs, to talk radio. The Hughes couple were the radio personalities; this was to cut costs on the station.

Radio One had bought other radio stations and their aim was to be able o “provide urban-oriented music, entertainment, and information to a primarily African-American audience in as many markets as possible.” The couple believed that this target segmentation had a lot of growth potential. The radio station has taken on a clustering strategy; this was done by acquiring two or more radio stations which targeted different demographics, keeping in mind the African-American population. This strategy in sales had worked for Radio One. The company had taken over the company in 1997, and is the son of Catherine Hughes; he and Scott Royster worked together for Radio One.  Liggins and Royster aimed to purchase radio stations and be able to convert audiences to be able to sell ratings and turn them into advertising revenue. To be able to do this, the two had to be able to gauge purchase prices which would make sense for the radio station.

From the years 1999 to 2004, the growth of Radio One can be seen. The net operating conversion feature is seen to improve through the years, with a PV factor of 13%. The beneficial conversion value at a multiple of 20 is seen at $62,193,000. The overall is valued at $619,373,000. Growth is seen to be at 0.115 from 1999 to 0.030 in 2004. Inflators remained steady at 0.050. Sales increased from $120,570,000 in 1999 to $181,176,000 in 2004.

A multiple of 16 is seen examined. This information is also in the time span of 1999 to the year 2004. The beneficial conversion feature is also seen at $62,193,000; its value is at $7,747,000. This sees a decrease in costs at -5%. Growth is seen to be from 0.140 in 1999 to 0.060 in 2004. This is followed by a steady inflation of 0.050. Sales are seen at $111,603,000 in 1999 and $196,604,000 in 2004; higher than that of a multiple by 20.

In the pessimistic case, with a multiple beneficial conversion feature of 2.5, the value is seen at $11,963,000. The beneficial conversion feature is still also seen at $62,193,000; and experiences very little or no growth at all throughout the five year time line. Growth remains at a monotone 0.050 from 1999 to the year 2003, and changes to 0.020 in the year 2004. This is seen at an inflation rate of a steady 0.050. Sales remain at a low from $111,603,000 in 1999 to about $138,367,000 in 2004.

Since there were problems seen by Liggins and Royster, when they had realized that purchasing radio stations in the top 50 markets rarely became available; however, this also being an unprecedented growth opportunity, there were factors to weigh out. To be able to do this, Radio One should be able to purchase 12 of the Clear Channel Stations in the top 50 markets. This would lead them to impacting the nation on a larger scale, and they would be able to have greater advertising revenue; this would be very important for the radio station’s expansion into other forms of media which follows the trend of globalization and technology. However, this does not come without its costs. Radio One must be willing to pay a large amount for broadcasting and the purchases of the other 12 radio stations.

Given the three scenarios, Radio One should aim at getting more advertising spots to increase and maximize their revenues. The best analysis presented of the three is seen at the 16^th multiplier. This showed the greatest increase in sales as well as in growth from $111,603,000 in 1999 and $196,604,000 in 2004. Radio One can opt to pay higher, up to a 20x multiple, yet this may seem to be too risky, and growth as well as sales did not seem to be that much higher than that of a 16x multiple. If it were the case that Radio One had enough revenue to expand and to be able to afford paying up to even 30x multiple, they should not yet take that opportunity, since they are first focusing on their growth and sales; a sudden dent in their budget could hinder them from doing other things which include their expansion in other forms of media.