Q1. Why does Warren Buffett want to buy MEG’s newspaper division?
Although Warren Buffett used to say, “We would not buy [newspapers] at any price,” and considered that newspaper industry had lost their essential nature in May 2009, his intention of purchase was not a sentimental gesture. He had several reasons to buy MEG’s newspaper division: The offer was about 63 medium and small newspapers. Even the newspaper industry was certainly in decline situation at the end of 2011. Compare to national circulation newspapers, the local newspapers held solid fan bases; in other words, they were less affected by the fallen trend (this was why Buffett ignored Tampa Tribune). According to a 2011 survey, 74% of people living in towns and small cities …show more content…
Thereupon, we decided to analyze the sensibility of cost of debt and capital structure: We have chosen the cost of debt because that different methods could be used to calculate this variable. The cost of debt referencing the debt rating of CCC+ had be used for the calculation above with a value of 10.26%. If we use the method of CAPM which is not very often using for the computation, we would find 4.1%, which is significantly smaller than 10.26%. Therefore, a sensibility analysis with 3 different cost of debt (4.1%, 7%, 10.26), is established in order to find the influence to the WACC. The capital structure directly appears in the formula of computation of WACC. It also has an impact on the beta and cost of equity. The capital structure of D/V = 37.5% used for the computation above is based on the weighted average debt to asset ratio of 3 peer companies. The problem here is the 3 companies may not be representative, because one of them is 100% equity financed and another one only has 50% activity related to the publishing industry. As a result, we have set a range between 27.5% and 47.5% for D/V ratio to observe the influence on the …show more content…
In minimum case, regardless of the WACC, the firm value can never reach $142M. This problem represents that the cash flow prediction, which may counter to macroeconomic background and MEG’s particular situation, is slightly over-optimistic. In base case, even the value of WACC is high as 12.75%, we can always have a firm value superior to $142M. Hence, although the company’s performance had already started to deteriorate since 2007 because the entire industry had faced sharp declines in both newspaper circulation and advertising revenues due to fierce competition from TV, radio broadcasting and digital media, if the forecast that the MEG began a recovery and obtained constant growth from 2014 could be achieved, the firm value at least equal to $142M would be
Although Warren Buffett used to say, “We would not buy [newspapers] at any price,” and considered that newspaper industry had lost their essential nature in May 2009, his intention of purchase was not a sentimental gesture. He had several reasons to buy MEG’s newspaper division: The offer was about 63 medium and small newspapers. Even the newspaper industry was certainly in decline situation at the end of 2011. Compare to national circulation newspapers, the local newspapers held solid fan bases; in other words, they were less affected by the fallen trend (this was why Buffett ignored Tampa Tribune). According to a 2011 survey, 74% of people living in towns and small cities …show more content…
Thereupon, we decided to analyze the sensibility of cost of debt and capital structure: We have chosen the cost of debt because that different methods could be used to calculate this variable. The cost of debt referencing the debt rating of CCC+ had be used for the calculation above with a value of 10.26%. If we use the method of CAPM which is not very often using for the computation, we would find 4.1%, which is significantly smaller than 10.26%. Therefore, a sensibility analysis with 3 different cost of debt (4.1%, 7%, 10.26), is established in order to find the influence to the WACC. The capital structure directly appears in the formula of computation of WACC. It also has an impact on the beta and cost of equity. The capital structure of D/V = 37.5% used for the computation above is based on the weighted average debt to asset ratio of 3 peer companies. The problem here is the 3 companies may not be representative, because one of them is 100% equity financed and another one only has 50% activity related to the publishing industry. As a result, we have set a range between 27.5% and 47.5% for D/V ratio to observe the influence on the …show more content…
In minimum case, regardless of the WACC, the firm value can never reach $142M. This problem represents that the cash flow prediction, which may counter to macroeconomic background and MEG’s particular situation, is slightly over-optimistic. In base case, even the value of WACC is high as 12.75%, we can always have a firm value superior to $142M. Hence, although the company’s performance had already started to deteriorate since 2007 because the entire industry had faced sharp declines in both newspaper circulation and advertising revenues due to fierce competition from TV, radio broadcasting and digital media, if the forecast that the MEG began a recovery and obtained constant growth from 2014 could be achieved, the firm value at least equal to $142M would be