Three Potential Financial Benefits

Question 1

Three Potential Financial Benefits

1.The future financial benefit of community newspaper is stable.

Before the discovery of telephone and internet, newspapers were the main source of news, so the newspaper is essential for most of communities. Berkshire (2013) states that people can acquire a mass of meaningful information from the advertisement of the newspaper. On the one hand, readers can find the information for renting a house, various job opportunities, and special offers for the chain supermarkets from the advertisements. On the other hand, local malls also need newspapers to advertise themselves to attract residents to purchase. Furthermore, newspapers still maintain the dominance of transmitting the local news. For instance, if people desire to know something occurred about their own community, they have to check their community newspapers to obtain this kind of information. Therefore, this is a complete chain of industries which can keep up to create profits.

2.Buffett did this acquisition at a relatively low price.

This acquisition costs 142 million US Dollars to purchase Media General which has local newspapers of 63 districts inside of the United States. Buffett only spent about 2 million US Dollars to purchase each local newspaper. Also, Media General (2012) claimed that the net deficiency of Media General for 2010 and 2011 is 22.6 million and 72.9 million dollars. This company is under the immense pressure from shareholders. Accounting for nearly half of income of Media General is newspapers, but it is still at a downward trend of profits earning. Thus, the sale of this part of company is the last choice of Media General. The boss of MG said that if they didn't sell capitals, they would file for bankruptcy in the nearly future, so this transaction completed at an extremely low price.

3. This acquisition can enlarge his media portfolio.

Buffett invested many newspapers before this acquisition, such as the Omaha World-Herald, the Washington Post and the Buffalo News (Berkshire 2013). These kinds of newspapers target the residents who live in the big city, and offer some international and financial information. This acquisition target the communities and provide some local and practical information. It can diversify the market target after this purchasing. Also, Buffett can make this transaction as a long-term investment to cultivate the loyal customers. It can be transferred to digital rechargeable version to reduce the printing costs in the future. This is also a great complement of this media portfolio.

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Question 2

a: Select a set of comparable firms.

The comparable firms of MEG’s newspaper are the A.H Belo Corporation (A) and Gannet Company Incorporated (G) . Because these two companies are the newspaper company, their main business are also publishing newspapers. Therefore, investors can use these the relative data of these two companies to forecast and estimate the value of WACC.

b: Calculate WACC, NPV and some related values.

The appropriate leverage ratio(D/V) equals to the average leverage ratio of two similar companies A&G for the current year, which comes to

[pic 1]

In a similar way, the asset beta () of MEG’s newspaper equals to the average asset beta of these two companies. The formula of calculating asset beta of A&G is that [pic 2]

[pic 3]

The question assumed that [pic 4]

The asset beta of A.H Belo is [pic 5]

The asset beta of Gannet is [pic 6]

Thus, the asset beta of MEG’s newspaper [pic 7]

According to the formula . If people desire to calculate the WACC of MEG’s newspaper, they should compute  and first. This question offered the market risk premium, people can calculate  and  by CAPM, which is showed as below[pic 8][pic 9][pic 10][pic 11][pic 12]

[pic 13]

From this formula, , it is an average value and remain constant, so  should be calculated, and WACC can be solved by this value. The risk free rate () of this question is the amount of 30 years US Treasury Yields (constant maturity) which is 2.9%, so the value of . People can use this formula to calculate  when  and  are known.[pic 14][pic 15][pic 16][pic 17][pic 18][pic 19][pic 20]

[pic 21]

Therefore, [pic 22]

[pic 23]

Assume the total growth rate of this company equals to the growth rate of revenues, people can find the related data from Exhibit 10. The forecasting value showed that the revenue growth rate of newspaper division is 2% from 2014 and remain the same value to the year end of 2016, so the estimated growth rate equals to 2%. People should use free cash flow and terminal value discounting to the present value to calculate NPV. Also, Buffett has not purchased about the Tampa Tribune due to its financial situation, so NPV should deduct 30 million to calculate the newspaper division. Firstly, people should compute the present value of free cash flow, the free cash flow of 2012 to 2016 has been forecasted in the Excel, which is 24.85, 19.64, 19.67, 20.98, 19.19. In addition, in the last year, there is a terminal value should be added to the total amount of cash flow. The formula and calculation are shown below:

[pic 24]

  Then people can discount the free cash flow to the present value (year ended 2011):

[pic 25]

Therefore, the present value of terminal value of 2016 is

[pic 26]

The net present value of cash flows will be

[pic 27]

[pic 28]

Therefore, the NPV of newspaper division is $175.75 million at the year end of 2011.

c. The unreasonable cash flow forecasts.

This cash flow may not reasonable enough by the analysis. Firstly, the growth rate will not be 2% in the future. In fact, this company nearly went bankrupt before the acquisition, the advertisement revenue of newspapers decreased by 57% from 2000 to 2010. At the same time, wages and pensions expense had a great increasing inside of the company. These two factors pushed the amount of the net income margin to become to a negative value. There is another evidence showed that the behaviour of this company is bad, the stock price of MEG was at an extremely low level compared with S&P 500 Index. Therefore, the revenue should also be assumed to a negative value due to these reasons.

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