Reference no: EM13690466

October 6, 2004, Sirius Satellite Radio announced that it had reached an agreement with Howard Stern to broadcast his radio show exclusively on their system. As a result of this announcement, the Sirius stock price increased dramatically. You are currently working as a stockanalyst for a large investment firm and XM Radio, also a satellite radio firm, is one of the firms you track. Your boss wants to be prepared if XM follows Sirius in trying to sign a major personality.Therefore, she wants you to estimate the net cash flows the market had anticipated from the signing of Stern. She advises that you treat the value anticipated by the market as the NPV of the signing, then work backward from the NPV to determine the annual cash flows necessary to generate that value. The potential deal had been rumored for some time prior to the announcement. As a result, the stock price for Sirius increased for several days before the announcement. Thus, your boss advises that the best way to capture all of the value is to take the change in stock price from September 28, 2004, through October 7, 2004. You nod your head in agreement, trying to look like you understand how to proceed. You are relatively new to the job and the term NPV is somewhat familiar to you.
1.To determine the change in stock price over this period, go to Yahoo! Finance (https://finance.yahoo.com) and enter the stock symbol for Sirius (SIRI). Then click "Historical Prices" and enter the appropriate dates. Use the adjusted closing prices for the two dates.


2.To determine the change in value, multiply the change in stock price by the number of shares outstanding. The number of shares outstanding around those dates can be found by going to https://finance.google.com and typing "SIRI" into the "Search" window. Next, select the Income Statement link on the left side of the screen, and then select "Annual Data" in the upper right-hand corner. The "Diluted Weighted Average Shares" can be found for the 12/31/2004 income statement on that page.


3.Because the change in value represents the "expected" NPV of the project, you will have to find the annual net cash flows that would provide this NPV. For this analysis, you will need to estimate the cost of capital for the project. We show how to calculate the cost of capital in subsequent chapters; for now, use the New York University (NYU) cost of capital Web site (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm). Locate the cost of capital in the far-right column for the "Entertainment Tech" industry.


4.Use the cost of capital from the NYU Web site and the NPV you computed to calculate the constant annual cash flow that provides this NPV. Compute cash flows for 5-, 10-, and 15-year horizons.


5.Your boss mentioned that she believes that the Howard Stern signing by Sirius was actually goodfor XM because it signaled that the industry has valuable growth potential. To see if she appears to be correct, find the percentage stock price reaction to XM (XMSR) over this same period.