Radio One Case

Radio One Inc. is a company that was founded in 1980 by Catherine Hughes who had learned the radio business while teaching at Howard University. Catherine and her husband purchased WOL-AM in Washington, D.C. for just under one million dollars. Hughes changed the format from R&B music and public affairs to talk radio. To cut back on expenses the Hughes became radio personalities. Expansion for Radio One began in 1987 when the Hughes' purchased WMMJ-FM in Washington for about $7.5 million and began broadcasting a new musical format targeting African-Americans. In 1992 and 1993, Hughes acquired four stations in Baltimore, Maryland, for $6.4 million and in 1995 purchased WKYS-FM in Washington for $34 million. Also, in 1995 Alfred Liggins
Historically African-American urban listeners targeted advertising dollars fell well below those of the general population. Radio One was able to use its multiple stations to sell more advertising by singling out the African-American market. Advertisers were not willing to pay as much to advertise their products and services to the largely African-American urban listeners because their income was not consistent with the general populations. Radio One was able to show advertisers that African-Americans did purchase more of certain goods & services than the general population despite their lower incomes. Radio One was also able to show advertisers that the African-American population was expected to grow 60% more than the general population and their income growth was expected to grow 150% faster than other races between 1980 and
There are several alternatives available to Radio One, the first dealing with what they should do concerning the new stations and the other is if they decide to purchase them what direction should they take? In 1999, Radio One has the opportunity to purchase the 21 stations with the capital they have raised with their IPO and other capital, or they can decide not to buy the additional stations. If they decide not to purchase the additional stations, they will need find a way to invest the money to increase shareholder wealth.
We will deal with Radio One purchasing the 21 stations and how they should pay for it. We have several alternatives, which are discussed below: Methods of Purchasing
• Discounted Cash Flow: using this method (example: Discounted Cash Flow Analysis), we calculated the value as $1.11 billion, which is actually the closest value to the real price that they paid, $1.36 Billion.
• Average of Trading Multiples: Using the average given to us in exhibit 8, the total cost would be $1.71 Billion, which would be close to the original price but would represent a over