iHeartMedia 2009 Annual Report Download - page 105

The key assumptions using the direct valuation method are market revenue growth rates, market share, profit margin, duration and
profile of the build-up period, estimated start-up capital costs and losses incurred during the build-up period, the risk-adjusted
discount rate and terminal values. This data is populated using industry normalized information representing an average FCC license
within a market.
Management uses publicly available information from BIA regarding the future revenue expectations for the radio broadcasting
industry.
The build-up period represents the time it takes for the hypothetical start-up operation to reach normalized operations in terms of
achieving a mature market share and profit margin. Management believes that a three-year build-up period is required for a start-up
operation to obtain the necessary infrastructure and obtain advertisers. It is estimated that a start-up operation would gradually obtain
a mature market revenue share in three years. BIA forecasted industry revenue growth of 1.9% and negative 1.8%, respectively,
during the build-up period used in the December 31, 2008 and June 30, 2009 impairment tests. The cost structure is expected to reach
the normalized level over three years due to the time required to establish operations and recognize the synergies and cost savings
associated with the ownership of the FCC licenses within the market.
The estimated operating margin in the first year of operations was assumed to be 12.5% based on observable market data for an
independent start-up radio station for both the December 31, 2008 and June 30, 2009 impairment tests. The estimated operating
margin in the second year of operations was assumed to be the mid-point of the first-year operating margin and the normalized
operating margin. The normalized operating margin in the third year was assumed to be the industry average margin of 30% and 29%,
respectively, based on an analysis of comparable companies for the December 31, 2008 and June 30, 2009 impairment tests. The first
and second-year expenses include the non-operating start-up costs necessary to build the operation (i.e. development of customers,
workforce, etc.).
In addition to cash flows during the projection period, a “normalized” residual cash flow was calculated based upon industry-average
growth of 2% beyond the discrete build-up projection period for both the December 31, 2008 and June 30, 2009 impairment tests. The
residual cash flow was then capitalized to arrive at the terminal value.
The present value of the cash flows is calculated using an estimated required rate of return based upon industry-average market
conditions. In determining the estimated required rate of return, management calculated a discount rate using both current and
historical trends in the industry.
The Company calculated the discount rate as of the valuation date and also one-year, two-year, and three-year historical quarterly
averages. The discount rate was calculated by weighting the required returns on interest-bearing debt and common equity capital in
proportion to their estimated percentages in an expected capital structure. The capital structure was estimated based on the quarterly
average of data for publicly traded companies in the radio broadcasting industry.
The calculation of the discount rate required the rate of return on debt, which was based on a review of the credit ratings for
comparable companies (i.e. market participants). The Company calculated the average yield on a Standard & Poor’s “B” and “CCC”
rated corporate bond which was used for the pre-tax rate of return on debt and tax-effected such yield based on applicable tax rates.
The rate of return on equity capital was estimated using a modified Capital Asset Pricing Model (“CAPM”). Inputs to this model
included the yield on long-term U.S. Treasury Bonds, forecast betas for comparable companies, calculation of a market risk premium
based on research and empirical evidence and calculation of a size premium derived from historical differences in returns between
small companies and large companies using data published by Ibbotson Associates.
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