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 owners received a promise in perpetuitv from the NBA that the NBA would pay 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 S4 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 thev want to know the reasonable minimum that will make them indifferent to the single payment in lieu of receiving the annual payments in perpe- tuity. Ignore income tax effects.

a. Assume the owners expect the TV revenues to remain constant, so that they can expect S4 million per year in perpetuity and use an interest rate of 8 percent in their discounting calculations. What minimum price should these owners be w illing to accept?

b. Refer to the specifications for the preceding question. 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 perpetuity. 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 increase, decrease, or remain

e. Refer unchanged'1 to the specifications in

c. If the ow ners 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?