Valuation of intangibles with perpetuity formulas. When the American Basketball Association (ABA) merged with the National Basketball Association (NBA), the owners of the ABA St. Louis Spirits agreed to dissolve their team and not enter the NBA.

In return, the NBA promised to pay, in perpetuity, to the Spirits' owners an amount each year equal to 40 percent of the TV revenues that the NBA paid to any one of its regular teams. Currently, the owners receive $4 million per year. The NBA wants to pay a single amount to the owners now and not have to pay more in the future. Of course, the owners prefer to collect more, rather than less, but here they want to know the reasonable minimum that will make them indifferent to receiving the single payment in lieu of receiving the annual payments in perpetuity. Ignore income tax effects.

a. Assume that the owners expect the TV revenues to remain constant, so that they can expect $4 million per year in perpetuity, and that they use an interest rate of 8 percent in their discounting calculations. What minimum price should these owners be willing to accept?

b. Refer to the specifications for

a. If the owners use a smaller interest rate for discounting, will the minimum price they are willing to accept increase, decrease, or remain unchanged?

c. The owners use an 8 percent discount rate, and they expect TV revenues to increase by 2 percent per year in peipetuity. What minimum price should the owners be willing to accept?

d. Refer to the specifications in

c. If the owners use a smaller interest rate for discounting, will the minimum price they are willing to accept increa.se, decrea.se, or remain unchanged?

e. Refer to the specifications in

c. If the owners assume a smaller rate for growth in future receipts from the NBA, will the minimum price they are willing to accept increase, decrease, or remain unchanged?

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