LIN Broadcasting was appraised in early $20$X$9$ by three investment bankers to determine the appropriate price on a takeover by AT&T$.$ The three appraisals came in at $$105$ by Morgan Stanley for AT&T$,$ $$155$ by Lehman Brothers for LIN Broadcasting, and a compromise valuation by Wasserstein Perella of $$127\mathrm{.}50.$ LIN Broadcasting is a fast$-$growing firm in a fast$-$growing industry segment. Revenues are expected to grow to $30\%$ a year for the next few years. The firm has never made a profit after taxes, even though it has posted high growth, because it has had high leverage and non$-$operating expenses. Prior to these charges however, it earned an operating income of $$128$ million in $20$X$8.$ Thus, although the FCFE is negative, the FCFF is positive. Finally, the financial leverage is high but can be expected to decline as the industry stabilises. The risk$-$free rate is $7\mathrm{.}5\%$ and the market risk premium is $5\mathrm{.}5\%.$ Given the following background information, compute the value of LIN Broadcasting if there are $51,502,000$ shares outstanding and the value of debt outstanding is $$1806\mathrm{.}60$ million? The firm$$s tax rate is $36\%.$

The background information on LIN Broadcasting is as follows: Current Earnings:

EBIT in $20$X$8=$ $$128\mathrm{.}3$m $($Revenue $=$ $ $688\mathrm{.}6$ m$)$ Capital expenditure in $20$X$8=$ $$150\mathrm{.}5$m Depreciation & Amortisation in $20$X$8=$ $$125\mathrm{.}1$m Working capital was about $10\%$ of revenues in $20$X$8$

Inputs for the high$-$growth period.

Length of the high$-$growth period $=5$ years Expected growth rate in revenues$/$EBIT $=30\%$ Financing Details:

$$ Beta during the high growth period $=1\mathrm{.}6$

$$ The firm will continue to use debt heavily during this period $($Debt Ratio $=60\%),$ at a pre$-$tax cost of debt of $10\%$

$$ Capital expenditure and Depreciation are expected to grow at the same rate as revenues and EBIT

$$ Working Capital will remain at $10\%$ of revenues during this period

Inputs for the transition period

Length of the transition period $=5$ years

Growth rate in EBIT will decline from $30\%$ in year $5$ to $5\%$ in year $10$ in linear increments Capital expenditure will grow at $8\%$ a year, and depreciation will grow at $12\%$ a year during the transition period

Financing Details:

$$ Beta will drop to $1\mathrm{.}25$ for the entire transition period

$$ The debt ratio during this phase will drop to $50\%,$ and the pre$-$tax cost of debt will be

$9\%$

Working Capital will remain at $10\%$ of revenues during this period

Using the $3-$stage dividend discount model question discussed in module $2$ as an example, estimate and value the cash flows of the firm for each of the three growth phases using the Free Cash Flow to the Firms $($FCFF$)$ method. use the below inofrmation; Inputs for the Stable Growth period

Expected growth rate in revenue and EBIT$=5\%$

Capital expenditure and depreciation will grow at the same rate as EBIT

Beta during the stable growth period $=1\mathrm{.}00$

The debt ratio during this phase $=40\%$ and the pretax cost of debt will be $8\mathrm{.}5\%$ Working Capital will remain at $10\%$ of revenues during this period