Model Stock Research for the Time-Warner Company Essay

Macro economic check up onBeing integrity of the fastest-paced and highest-profile industries in the military personnel, the media welkin has been in a whirlwind of win everyplace this preceding(a) decade. There has been an explosive boom and bankrupt and, of late, boom again, of meshing engine room. This has dramatic whollyy influenced media delivery. Clampd takes on shady accounting practices, as presents changing pass and a more than than than than discerning and demanding media consultation watch likewise envision to itd that budges in the application occurred at break-neck speed. This is wherefore orbiculate media giant, period Warner, has sought to embrace these ch onlyenges of the Indata contriveattingion Age. Indeed, fourth dimension Warner had uniquely positioned itself to benefit from the explosive changes. Their sizing and re get-gos put up them a formidable antagonist in the media arna beca office of their efficiency in an amplifyly glob al environment.In front man of the media arna, the aver date US citizen is confronted by more than 1,500 dailies, everywhere 5,700 weekly in the al togetherspapers, some 17,000 clip titles, 10,000 commercial radio gain vigorr stations and more than 1,600 TV stations. Nielsen Media Research reported that as of January 2003, 98.2% of the all everywhere 100 one thousand one one thousand thousand gazillion households own at least one TV set, with 69.8% of them hooked up to phone line characterisation function.The US overly exports a massive amount of its media, which has buy the farm close staple fargon near the knowledge domain. CNBC simply boasts a reach of 192 gazillion households worldwide, with 82m of them in the US and Canada. The latest obtainable gross domestic product statistics from the US Bureau of economic outline show that the radio and TV perseverance contri un slighted $72.9 one thousand thousand to the US GDP in 2001, up from $71.1 zillion in 2000. Total US GDP for 2001 was $10,082 one thousand thousand. In 2006, the US GDP is estimated at 3.2%, date the interest invests atomic number 18 at 8% (See Table 1).Table 1. join States Country Data and trade Indicators (EIU, 2006). seriesUnits200120022003200420052006Gross Domestic Product mark indicatorsGDP (% real change pa)0.81.62.53.93.23.2 pecuniary and monetary indicatorsInterest rates bestow interest rate (%)6.94.74.14.36.28.0Inflation and compensationConsumer tolls (% change pa av)2.81.62.32.73.43.3Demographics and income populationM285.1288.0290.8293.6296.4299.7GDP per steer ($ at uvulopalatopharyngoplasty)uvulopalatopharyngoplasty35524.236352.837691.739894.342023.744110.0PopulationPopulationM285.1288.0290.8293.6296.4299.7Population (% change pa)1.01.01.01.01.01.1Labour specialityM143.8144.9146.5147.4149.3151.4Recorded unemployment (%)4.75.86.05.55.14.6IncomeGDP per headUS$35524.236352.837691.739894.342023.744110.0Private consumption per headUS$24745.9255 23.426491.127969.429495.130960.0GDP per head ($ at PPP)PPP35524.236352.837691.739894.342023.744110.0Real GDP development per head (% pa)-0.20.61.52.92.22.1Personal disposable incomebnLCU7486.87830.18162.58681.69036.19580.2Personal disposable income (US$)MUS$7486840.07830080.08162530.08681560.09036100.09580150.0Real individualised disposable income (US$ at 1996 prices)MUS$6860090.07074210.07231140.07493920.07581650.07811600.0Real private disposable income (% change pa)1.93.12.23.61.23.0Average real wage king (LCU, 1996=100)107.3108.9109.4108.9108.1108.6Average real wages (% change pa)1.01.50.4-0.5-0.70.5 Fact catch ones breaths that US is the worlds with child(p)gest media producer as comfortablyspring as consumer. publicize is the main opening of taxation enhancement, although some sectors as well create taxations from subscriptions. Media concerns with diversion arms view additional sources of income by dint of pickingss from gaming, distri simplyion rights, amuseme nt prevalent entrance fees and spin-off merchandise.Also, merriment is one of Americas top exports. In 1999, in fact, film, television, music, radio, advertisement, print make, and computer softw atomic number 18 product together were the top export, almost $80 one thousand thousand worth, and piece softw ar alone accounted for $50 billion of the complete, some of that sept overly qualifies as entertainment telly games and pornography, for example. Hardly anyone is exempt from the force of Ameri john images and sounds. . . . Ameri stop popular agriculture is the terror that hundreds of billionsperhaps billionsof people love, and love to hate. The antagonism and the dependency are inseparable, for the media oodessentially American in its origin, but virtually eternal in its reachrepresents, like it or not, a common imagination.However, media availability is pretty disproportionate to the time an average American has to consume in constitution. But the industry is a lu crative one and media spinners are finding spick-and-span ways to make the open continue to consume media and pay for it. In 2001, companies in the media industry save primitive receiptss of $261.7 billion. Although this was a maturation over 2000s $255.2 billion, make pass income had been steadily falling since 1998. This can be attributed largely to the fact that bank line and satellite go awayrs experienced rising alimony equal and were intrusting heavily in stark naked technology. The decline in income is pass judgment to ease over the next fewer geezerhood as investments on new delivery take start to conquer fruit.Because of this, some(prenominal) companies started holding back on publicizing activities fol imprinting the recession in 2001. The 911 tragedy, the subsequent wars in Afghanistan and Iraq and their accelerator effect on the economic downturn, brought change magnitude uncertainties to the root securities industryplaces and exacerbated the announce slowdown. This downtrend was turn throughout most of 2002 as some(prenominal) believed a swift end to the Iraki invasion would emerge. marketplace jitters pass awayed in the third buns of 2002 and earlier in 2003, which somewhat stalled advertising expansion as the Iraqi situation ref utilise to look as good as the Presidents claims.However, tentative cheers on US traffic floors and moderate improvements in the job market place slowly built up advertising momentum in the third quarter of 2003. For example, clipping-Warners system has insisted on managing their cost aggressively. In 2005, they undertook difficult, but necessary, restructurings at a number of our divisions to ensure that their costs are aligned with their desire-term strain commands. At Warner Bros., for example, they blowlined their charge to create a single Home Entertainment aggroup to oversee the digital delivery of entertainment to consumers. Looking ahead, they plan to reduce costs by $1 billion crossways their bloodes in 2006 and 2007.Trade disputes with the EU and chin assured and persistent trouble for US interests in Europe and the Middle East are forming grey clouds over the economic horizon. Also, big budget media advertising, with the exception of outdoor advertising, is forever sparse at class-end when readership and viewing audiencehip are traditionally down due to a lack of new programs and study uninfected events.Consumers are usually on holiday or out holiday shop at social class-end, rather than at base of operations reading or sitting in front of the box, giving media advertising less(prenominal) reach. However, prudent companies are aware that a prolonged advertising drought can adversely affect target recall and consequently spell sluggish product movement. Thus, although advertising gross step-ups were more modest than expected in 2003, with the exception of contrast television, syndication and Spanish network components. This in come source is predicted to grow in 2004.As age Warner moves forward with these external challenges, the foundation of their strategy is to invest our pecuniary resources in a disciplined manner to provide the best possible return to their doweryholders. This imagines concentrate on the right businesses. Their board of directors and management continuously evaluate metre-Warners businesses to ensure that they meet their standards for financial performance, growth and return on investment.Industry OverviewThe United States market for strain and satellite TV go has grown by 6.5% since 2003 to reach a entertain of US$57.6 billion in 2004. Over 2001 to 2005, value gross sales gain by 36.5%. Over 73 gazillion American households subscribed to pipeline television function with 34% of them having digital supporter in 2004. In 2004, the average calendar monthly price for set offed basic computer programming packages was US$38.23. Satellite TV function are expected to conti nue to increase in popularity. Satellite TV is offering aggressive pricing packages relative to cable, an increasing number of special interest conduct and local gets in all markets.Local channels were previously in recoverible to subscribers. Despite the spate of satellite TV, snip Warners networks and cable atoms exhaust been notice consistent revenue growth in late(a) socio-economic classs. tax revenue from the networks segment increase from $8,434 cardinal in 2003 to $9,611 meg in 2005, representing a growth rate of 7%. Revenue from the cable division change magnitude from $7,699 one one thousand trillion meg in 2003 to $9,498 meg in 2005, representing a growth rate of 11%.These two segments together contribute more than 42% of the integrality revenues of the club. Increasing segmented revenues allow contributed in the troupes overall revenue growth of 3.7% in pecuniary 2005 over fiscal 2004. This is why cable television pull up stakes in all likelihood continue to fork up healthy revenue growth for owners of those networks, though gains may puff up be slower than over the then(prenominal) several years. Beneficiaries of ongoing strength in cable include Viacom, term Warner, word Corp. and Disney.The most significant changes in the media industry in the past decade have been in its leadion of the network technology. The internet has evolved from being just a communication theory tool to becoming an important entertainment, business and marketplace platform. Catching up is the cable segment, which is embracing wideband technology in earnest and is rapidly overtaking the consumption of traditional dialup technology in furnish telephony and especially internet run to North American floors.From 1996 through 2003, the US cable industry spent $75 billion in private enceinte on plant and equipment as well as infrastructure upgrades, according to NCTA. The cable industry in its listity is pitiable from analog to digital te chnology to repugn with the high-calibre, low-interruption signal transmission broadcast by DBS companies, which have been offering high quality, encrypted digital transmission almost since day one. The emulation between cable and satTV is becoming more intense. Apart from normal TV programs and mental picture line-ups, both offer interactive (cable TV being a recent entrant) and internet technologies on their systems.Both are taking the TV experience to new heights. non only can the viewer coquette interactive games on TV but they can also interact with programs they are watching, for example responding to interactive surveys or make immediate purchases on shopping channels via the remote go steady. Latest technological advancements also allow viewers to record, pause, forward and round-face live programs or watch them in slow motion or photoflash replay using digital person-to-person video recording (DVR or PVR) and video on demand (VoD) devices for satTV and cable TV, one by one.Unfortunately, the digital revolution is bringing problems to some in the industry. Content and program providers are nauseous over the dent DVRs and VODs may make in their lolly. How serious their concerns are remain to be seen, but ob answerrs of the industry are noting that a predecessor of DVRs and VODs, the VCR, was greeted with the alike(p) disquietude, which was in brief replaced with blithe indifference as the technology propagated a new earning punkacity, that is, the sale of videos.An anaesthetize that b some others media executives is their loss of control over viewers. viewers can replay scenes they like during a commercial break, thus effectively bypassing messages from advertisers, who materialise to be program sponsors. This could force advertisers to see TV as a less effective advertising channel than it used to be and give them better leverage at commercial slot price negotiation or cause them to adopt other advertising media.As viewers become more d iscerning, they are demanding great viewing variety and higher quality programs. They are also getting hi-tech, pursuit a greater, more interactive TV viewing experience much as they have come to expect from their personal computers. The FCC, the federal official regulator for the media and telecommunications industry, is aware of this and is thrust the industry to hurry the digital transition. The FCC has mandated that all TV broadcast stations have mellowed Definition TV (HDTV) broadcast medium capability by 2006. This leave mean a big outlay for broadcasters and cable companies in the coming few yearsBroadcasters and program networks volition have to invest in new cameras, titling and editing equipment and attach machines that support the digital TV (DTV) format and revamped rigs for DTV friendly TV vans. line of business operators guide to convert all their equipment and set-top boxes. However, for viewers with HDTVs, the set-top boxes are bypassed. clipping Warner had responded to this challenge through Warner Bros Entertainment, a subsidiary of the troupe when it tied up with CBS companionship to form a new broadcast network. This new network, The CW, to be launched in late 2006, can significantly expand conviction Warners customer base. period Warners Cartoon cyberspace channel entered into a mutual post with VIZ Media to form Toonami Jet germinate, a new broadband service to provide streaming episodes of animation series. Toonami Jetstream will allow users to view episodes of Cartoon network in their own time and also provide an alternative distribution fomite for magazine Warner. These alliances and joint guesss can provide Time Warner with a competitive receipts over its peers and enable it to enhance its revenue position.Expanding broadband marketMost players in the cable industry have begun the digital journey but consumers may fluid need to dig into their pockets to enjoy the digital experience and make the analog age a thing of the past. They have to every buy new set-top boxes, which convert digital signals to analog, or buy HDTV sets, which say between just under $1,000 to almost $10,000. Early in June 2003, when the FCC eased its decades-old restrictions on the size of media entities, controversy erupted. Large media companies hailed the move.Consumer groups condemned the termination as bad give-and-take for studyity rule and local content. The new rule, which allowed media companies to have US shrewdness cap of 45% kinda of the old 35%, was good news to media giants who were operating(a) at close to the 35% limit. They had been lobbying hard for the lift, including Viacom, whose $40.6 billion purchase of CBS makes it the US largest single operator of TV and radio stations, reaching 41% of the get along internal broadcasting market.The 45% rule looked set to open the floodgates for other media liberalization that would allow TV, radio and newspaper owners much more room for consolidation. If a large TV station acquired a small, one-paper town market, the participation would be dominated by that entity. This would move local content in the participations media. However, the 45% rule was block up by Congress in a massive 400 to 21 suffrage in July 2003. This was followed by a baulk order by a federal court some few weeks later.Should the FCC bolt to appeal to have the new cap reinstated, media giants who have exceeded the old limit will have to shave off their access assets and those nearing the demarcation point will need to strike out expansion as a way to increase income. Time Warner, which garners some revenues from films, should grow its studio winnings well. It is releasing several DVDs of popular titles. claim hits generally sway on the timing of releases. Viacom, Disney, and Dreamworks Animation also have large stakes in the sector, which will likely move further towards home viewing via digital cable and the Internet.Having many cities that are highly cos mopolitan, the US has various(a) minority and ethnic groups which are tone for more than just generic programs that do not necessarily depict their lifestyles or cater to their tastes. Many minority group comm unities have been addressing these issues by producing their own newspapers, TV programs and radio broadcasts.As their respective populations grow, so has the amount of business of their specialty media. Having long observed the growth of these niche markets, bigger players are now making moves toward grabbing a slice of the ethnic specific media pie that serve large minority communities. Previously, being culture sensitive meant placing non-Caucasian actors in supporting government agencys but, belatedly, major media companies are dedicating whole TV and strait channels to specific ethnic groups.In the media industry, the basic services were the largest sector, accounting for 53.1% of sales in 2004, worth US$30.6 billion. Advertising was the most dynamic sector. Growing f rom US$8.5 billion in 2000 to US$15.9 billion in 2004, this sector achieved 87% growth. Pay-per-view movies grew by US$400 one thousand thousand over the review period, to account for 2.8% of sales in 2004. In 2004, premium channels accounted for US$9.5 billion, or 16.5% of the market, realizing 13% growth. argument TV continues to dominate the premium TV market with 76 portion of households and its market penetration is still increasing.Table 2. United States Media Market Sectors US$ billion20002004Advertising8.515.9 prefatory services24.130.6Pay-per-view movies1.21.6Premium channels8.49.5 fount Euromonitor InternationalIn terms of performance, Comcast wad was the leader of cable and satellite TV services in the United States in 2004 with 32% market deal. It maintained its spark advance position through product intention and differentiation including its ON DEMAND offerings, increased regional sports programming and its leading Comcast.net portal. Time Warner Inc had the sec ond largest market share in 2004 at 17.2%.This was an increase of 9.5% in 2003. AOL Time Warner was able to increase its position by taking a lead role in offering new products to its customers including High Definition Television, the Digital Video Recorder, radio set Home interlockingworking, and Digital Telephony service. by means of expansion of its US market, Cox communications Inc. increased its market share by 7.7% from 2003 to 9.7% in 2004. Charter communications maxim its market share decrease to 9.3% in 2004.Table 3. United States Media Market role % value of market sector2004Comcast Corporation32.0AOL Time-Warner Inc17.2Charter Communication9.3Cox Communications Inc9.7Adelphia8.2Source Euromonitor InternationalIn the global arena, Hollywoods long-standing tensions with China has interpreted its toll as Time Warner is drag out of an ambitious, four-year theater venture in the country because of tightened restrictions on foreign ownership. The determination was anno unced in November 2006 came after its Warner Bros. unit tried un prosperingly for more than a year to negotiate a via media with the Chinese government over a July 2005 ruling requiring outside investors to cede control in ventures to their Chinese partners. Warners finish underscores Hollywoods frustrations operating in China. Although studio executives consider China to be the worlds best growth opportunity for U.S. entertainment, they also are circumspect of expanding there, in part because of what they believe are burdensome government rules.Although the media market is fraught with rivals, Time Warner had been a formidable competitor because it offers diversified, yet encomiastic products and services. The troupe operates in print media, television, cinemas, internet, cables services and wired broadband segments. Leveraging its operations in complimentary segments the company has been able to reproduce the alike content in various formats to generate additional sales. Its wide product portfolio has also allowed the company to offer superior bundles to the customers. conjunction Analysis Time-WarnerTime Warner is one of the worlds leading media and entertainment companies. Its major businesses encompass an array of respected and successful media dents. Among the companys brands are HBO, CNN, AOL, Time, Fortune, People, Sports Illustrated, and Time Warner Cable. CNN operates in nearly 200 countries, while AOL is the worlds leader in interactive services with 19.5 zillion subscribers in the US and 6 million in Europe at the last count. Time Warners cable business, Time Warner Cable (TWC), is the second-largest cable operator in the US while Warner Bros is one of the worlds leading studios. These are well established brands with global brand recall. The company can leverage the rightfulness of its brands to generate sales. stark naked developments continue to stream in Time-Warner. In 2004, Time Warner Cable announced the creation of a new business unit, Time Warner Cable component part Services. This creation was responsible for overseeing the rollout of its residential ring service, known as Digital Phone. During the identical year, AOL Europe, and Google, announced a new multi-year symmetry to provide targeted advertising from Googles AdWords advertisers for the subscribers of AOL Europe. In February 2005, Warner Home Video announced the formation of CAV Warner Home Entertainment Company, a joint venture with China Audio Video.The company entered into a joint venture with in the altogether Line Cinema to form Picturehouse. AOL announced the acquisition of Weblogs, a blogging company. AOL also acquired an online digital music subscription company called practice of medicineNow in November 2005. During the resembling month the company, along with several other cable companies concluded an agreement with Sprint. fit in to the agreement, the companies would form a joint venture for providing wireless and wireline entert ainment product.AOL acquired Truveo, a innovate in internet video inquisitive in January 2006. In the same month Time Warner entered into an agreement with CBS to launch a new television network, The CW. Cartoon Network formed a joint venture with VIZ Media to create Toonami Jetstream, to provide broadband video services in April 2006.Time Warner has been continually profitable. The company recorded revenues of $43,652 million during the fiscal year ended December 2005, an increase of 3.7% over 2004. For the fiscal year 2005, the US, the companys largest geographic market, accounted for 79% of the integral revenues. Time Warner generates revenues through its five business divisions filmed entertainment (26.4% of chalk up revenue during fiscal year 2005), networks (21.3%), cable (21%), AOL (18.3%), and publication (12.9%).During the fiscal year 2005, the filmed entertainment division recorded revenues of $11,924 million, an increase of 0.6% over 2004. The networks division record ed revenues of $9,611 million in fiscal year 2005, an increase of 6.2% over 2004. The cable division recorded revenues of $9,498 million in fiscal year 2005, an increase of 12% over 2004. The AOL division recorded revenues of $8,283 million in fiscal year 2005, a decrease of 4.7% from 2004. The publishing division recorded revenues of $5,846 million in fiscal year 2005, an increase of 5% over 2004.By geography, the U.S. remains Time Warners largest geographical market, accounted for 79% of the total revenues in the fiscal year 2005. Revenues from the US reached $34,469 million in 2005, an increase of 2.7% over 2004. other(a) international countries accounted for 6.7% of the total revenues in the fiscal year 2005. Revenues from other international countries reached $2,907 million in 2005, an increase of 4.5% over 2004. The UK accounted for 6.6% of the total revenues in the fiscal year 2005. Revenues from the UK reached $2,886 million in 2005, an increase of 15.1% over 2004. Germany accounted for 2.8% of the total revenues in the fiscal year 2005.Revenues from Germany reached $1,233 million in 2005, an increase of 6.2% over 2004. France accounted for 2.2% of the total revenues in the fiscal year 2005. Revenues from France reached $941 million in 2005, an increase of 7.1% over 2004. Canada accounted for 1.4% of the total revenues in the fiscal year 2005. Revenues from Canada reached $625 million in 2005, an increase of 24.3% over 2004. japan accounted for 1.4% of the total revenues in the fiscal year 2005. Revenues from Japan reached $591 million in 2005, a decrease of 13.7% from 2004. financial Statement AnalysisCompany Posted gross sales monetary socio-economic classTotal Sales200339565200442089200543652 favorableness proportionalitys2007*2006*20052004 2003SalesGross Margin operate Margin (%)Pre-Tax Margin (%)Net gather Margin (%)Accounts payableNet ExpensesInventoriesRevenues per shareCash-Flow per share allowance per share465000.4308.312.931.1449000.4301 1.411.83.121.35436520.04326.069.376.651,380,00013,676,0001,806,0009.7051.3740.62420890.042 32.00811.66 7.991,494,00013,094,0001,737,0009.3542.0760.68395650.04130.6811.426.671,629,00012,559,0001,390,0009.032.0240.68*Projected (Source note valueline coronation Survey).Time-Warner remains to be an otherwise brilliantly entertainment conglomerate. The companys networks and cable segments have been posting consistent revenue growth in recent years. Revenue from the networks segment increased from $8,434 million in 2003 to $9,611 million in 2005. Revenue from the cable division increased from $7,699 million in 2003 to $9,498 million in 2005. These two segments together contribute more than 42% of the total revenues of the company.Increasing segmental revenues have contributed in the companys overall revenue growth of 3.7% in fiscal 2005 over fiscal 2004. After trying to explicate a way to maintain AOLs subscription service in a high-velocity world, management finally threw in the pas s over and decided to give AOLs services away for free, focusing on advertising revenue. The move may have been late, but not so late that it wint help stem AOLs user base. The big concern is if advertising revenues will be sufficient to first gear subscription losses. Still, this property is an important part of the companys overall collection of media- associate businesses.Moreover, the performance of the filmed entertainment segment and AOL segment has been weak in the past tierce years. Revenue from the filmed entertainment segment grew by as little as 0.6%. Revenues from the AOL segment declined from $8,598 million in 2003 to $8,283 million in 2005, representing a growth rate of -2%. The two segments contribute around 45% of the total revenues of the company. A weak operating performance by these segments indicates that the company has been losing launch to its competitors.The reason for this projection and sees is that TWX remains to be garnering operating profit. Althoug h net profit have declined in fiscal 2005 compared to fiscal 2004, operating profits and net profits declined 26.7% and 13.6% respectively in fiscal 2005.The companys operating allowance declined from 14.6% in fiscal 2004 to 10.4% in fiscal 2005, while the companys net profit margin declined from 8% to 6.6% in the same period. Declining profit margins indicate increasing costs and can adversely affect the companys long term financial position. Declining property from operating activities Time Warners specie flows from operations have been declining in recent years. Cash from operations have declined from $6,601 million in fiscal year 2003 to $4,965 million in 2005. Declining notes flows can force the company to borrow external expectant to fund its growth plans, which could prove to be expensive.TWX disassociatend Rate Per dower ($)Shares Outstanding (M)Ave. workaday Volume (M)BetaShareholdersMarket exhaust hood ($M)Institutional Holdings (%)Yield (%)12-month P/E 0.223972.58 23.442.032956,50083066.572124.6We can use the dividend discount model to estimate the cost of common stock. The difference between common stock and preferred stock is in our assumption about the growth conventionalism of future dividends. With common stock, we typically come across that dividends grow at a constant quantity rate into perpetuity. Then we can hold open the present value of the assumed dividend stream asP 0 =D 1-( 1 + k s )where,P0 = the common stock price per share.D 1 = the dividend per share one year from now.ks = the required rate of return on common stock.If we solve for ks, we getks =D 1-P0At present, TWXs stock price was at $20.14. TWX has historically stipendiary out about 40 percent of its earnings as dividends. Therefore, with a omen of about $0.55 per share in earnings for next year, TWXs dividend would be forecast to be $0.55 .40 = $0.22 per share. So, the dividend yield, defined as D1/P0, is $0.22/$20.14 = .0109, or 1.09 percent.TWXs Key Growth judg e and AveragesPast Growth Rate (%)1 form3 eld5 courses9 YearsSales3.712.5629.0549.46Net Income-9.47Ratio Analysis (Annual Average)Net Margin (%)6.657.41LTD of Capitalization (%)19.4821.0120.7121.15Return on rightfulness (%)4.715.328.18Pricing/Earnings new monetary value20.14P/E Ratio15.612P/E (Trailing)14.183P/E (Median)NMFRel. P/E Ratio0.724RatingsFinancial StrengthB++Stocks Price Stability40Price Growth Persistence20Earnings Predictability20Relative ValueYear 200020012002200320042005200620072008Free CFs11.812.813.513.916.017.920.122.5PV of FCFs10.179.588.657.687.627.367.10WACC = 16%Long run g = 12%MV of Debt = $202 millionNo. of shares = 50PV of FCF1-7 = 50.97TV at Year 7 of FCF after Year 7 = FCF8/(WACC g) = $448.00PV at of TV at Year 0 = TV/(1+WACC)7 = 183.88 check = Value of the Total Corporation = $234.85 million little MV of Debt and Preferred = $202 millionValue of Common lawfulness = 32.85Divide by No. of Shares = 50Value per Share = Value of Common Equity/No. Shares = $0.66Assuming that beginning in the fourth year, the free capital flows are to grow by 10% less than previously predictedYearOld FCFNew FCF12001$11.8$11.822002$12.8$12.832003$13.5$13.542004$13.9$12.552005$16.0$14.462006$17.9$16.172007$20.1$18.182008$22.5$20.2 We will assume that the long-term growth rate and WACC will be the same as previously assumed. From thisinformation, we can do the following calculations.Total PV of New FCFs, Years 1-7 =$55.09FCF 8 = $20.23 $20.23TV at Year 7 $505.76 = -PV of TV $178.95 4% = WACC- gLMarket Value of Total Company = $234.05Less MV of Debt = $202Market Value of Equity = $32.05No. of Shares = 50Value Per Share = $0.64 versus $ 1.37 under original assumptions. Therefore, a 10% reduction in some of the cash in flows leads to a 53.28% decline in the value per share.As of September 30, 2006, TWX had net debt of $202 billion (including $11 billion on the Adelphia deal), and a net debt/EBITDA ratio of about 3.0X. In 2005, TWX paid out $2.8 billion related to a government settlement. Including the acquired systems, management sees low double-digit adjusted EBITDA growth in 2006 (off a restated base of about $10 billion in 2005), with 35% to 45% passage of EBITDA into free cash flow. Management plans about $1 billion of cost cuts in 2006 and 2007 (excluding the $1 billion of cuts at AOL as previously mentioned). We project free cash flow of over $11 billion in 2006 and 2007 combined.Pursuant to a $20 billion share buyback program, TWX plans to salvation about $15 billion of its shares in 2006, and the remainder in 2007. Over the nightlong term, the company targets a 3X leverage ratio. TWX began paying(a) a quarterly cash dividend of $0.05 per share on its common stock in the 2005 third quarter (about $900 million a year), raising it to $0.055 in July 2006. TWX would also receive about $600 million in cash from the dissolution of its cable joint venture with Comcast.TWX undertook several asset divestitures in the past few yea rs to enhance its financial flexibility, notable among which are the 2004 sale of its Warner Music Group (for $2.6 billion in cash), a 50% stake in japery Central ($1.2 billion), a DVD/CD manufacturing business ($1 billion), and two NBA and NHL passkey sports teams (undisclosed). Also, in 2006, TWX sold its book publishing business for $532 million in cash, and its food turner South network for about $375 million in cash. TWX also raised $239 million from the sale of stock in Time Warner Telecom.