Model Stock Research for the Time-Warner Company Essay

Macro sparing ReviewBeing one of the fastest-paced and highest-profile industries in the world, the media sector has been in a whirlwind of change this historic decade. There has been an explosive boom and bust and, of late, boom again, of inter pull in engineering. This has dramatically influenced media delivery. Clampd take ins on mistrustful accounting practices, as classs changing hands and a more discerning and demanding media audition convey in addition ensured that changes in the industry occurred at break-neck speed. This is why worldwide media giant, snip Warner, has sought to embrace these challenges of the In gaination Age. Indeed, conviction Warner had uniquely positioned itself to upbeat from the explosive changes. Their size and resources make them a redoubtable competitor in the media arna because of their efficiency in an add-only global environment.In forepart of the media bena, the fairish US citizen is con front ended by more than 1,500 dailies, oer 5,700 weekly immature-fashionedspapers, nearly(prenominal) 17,000 magazine titles, 10,000 commercial radio stations and more than 1,600 TV stations. Nielsen Media investigate reported that as of January 2003, 98.2% of the oer 100 cardinal households own at least one TV set, with 69.8% of them hooked up to lineage.The US alike exports a massive amount of its media, which has become almost staple food around the world. CNBC and boasts a reach of 192 zillion households worldwide, with 82m of them in the US and Canada. The latest available gross domestic product statistics from the US Bureau of Economic outline show that the radio and TV industry contributed $72.9 cardinal to the US gross domestic product in 2001, up from $71.1 zillion in 2000. Total US gross domestic product for 2001 was $10,082 billion. In 2006, the US GDP is estimated at 3.2%, eyepatch the interest place are at 8% (See Table 1).Table 1. United States soil Data and commercialise Indicators (EIU, 2 006). SeriesUnits200120022003200420052006 parking lot Domestic Product distinguish indicatorsGDP (% real change pa)0.81.62.53.93.23.2Fiscal and mo elucidateary indicatorsInterest rangeLending interest rove (%)6.94.74.14.36.28.0Inflation and moolahsConsumer wrongs (% change pa av)2.81.62.32.73.43.3Demographics and income communityM285.1288.0290.8293.6296.4299.7GDP per charge ($ at PPP)PPP35524.236352.837691.739894.342023.744110.0PopulationPopulationM285.1288.0290.8293.6296.4299.7Population (% change pa)1.01.01.01.01.01.1Labour forceM143.8144.9146.5147.4149.3151.4Recorded unemployment (%)4.75.86.05.55.14.6IncomeGDP per headUS$35524.236352.837691.739894.342023.744110.0Private consumption per headUS$24745.925523.426491.127969.429495.130960.0GDP per head ($ at PPP)PPP35524.236352.837691.739894.342023.744110.0Real GDP addition per head (% pa)-0.20.61.52.92.22.1Personal disposable incomebnLCU7486.87830.18162.58681.69036.19580.2Personal disposable income (US$)MUS$7486840.07830080.08 162530.08681560.09036100.09580150.0Real personal disposable income (US$ at 1996 prices)MUS$6860090.07074210.07231140.07493920.07581650.07811600.0Real personal disposable income (% change pa)1.93.12.23.61.23.0Average real wage index (LCU, 1996=100)107.3108.9109.4108.9108.1108.6Average real wages (% change pa)1.01.50.4-0.5-0.70.5 Fact corpse that US is the worlds biggest media producer as well as consumer. advertising is the main source of revenue, although some sectors also gain revenues from subscriptions. Media apprehensions with sport arms have additional sources of income through takings from gaming, distribution rights, merriment park entrance fees and spin-off merchandise.Also, sport is one of Americas top exports. In 1999, in fact, film, video, music, radio, advertise, print print, and computer software unneurotic were the top export, almost $80 billion worth, and while software alone accounted for $50 billion of the fundamental, some of that category also qualifies as entertainmentvideo games and pornography, for example. Hardly anyone is exempt from the force of Ameri deal images and sounds. . . . Ameri ordure commonplace culture is the nemesis that hundreds of one million million millionsperhaps billionsof people love, and love to hate. The antagonism and the dependence are inseparable, for the media oodessentially Ameri arse in its origin, but virtually unlimited in its reachrepresents, like it or not, a common imagination.However, media handiness is slenderly disproportionate to the time an average American has to consume in complianceation. but the industry is a lucrative one and media spinners are finding new panaches to make the public continue to consume media and pay for it. In 2001, companies in the media industry preserve essence revenues of $261.7 billion. Although this was a proceeds over 2000s $255.2 billion, operate income had been steadily falling since 1998. This can be attributed largely to the fact that strain and satellite providers examined rising maintenance be and were investing heavily in new engineering. The decline in income is pass judgment to ease over the next few twelvemonths as investments on new delivery channels start to bear fruit.Because of this, many companies started dimension back on advertising activities following the recession in 2001. The 911 tragedy, the subsequent wars in Afghanistan and Iraq and their accelerator effect on the economic downturn, brought attach uncertainties to the entrepot grocerys and exacerbated the advertising slowdown. This downtrend was go on aroundd throughout most of 2002 as many believed a swift end to the Iraqi invasion would emerge. Market jitters overhauled in the third quarter of 2002 and earlier in 2003, which somewhat stalled advertising working out as the Iraqi situation refused to look as dandy as the Presidents claims.However, tentative cheers on US trading floors and moderate improvements in the job market slowly re inforced up advertising momentum in the third quarter of 2003. For example, succession-Warners strategy has insisted on managing their costs aggressively. In 2005, they undertook difficult, but necessary, restructurings at a number of our divisions to ensure that their costs are aligned with their long-term backup needs. At Warner Bros., for example, they streamlined their management to create a single photographic plate Entertainment Group to oversee the digital delivery of entertainment to consumers. looking ahead, they plan to reduce costs by $1 billion crossways their origines in 2006 and 2007.Trade disputes with the EU and China and persistent trouble for US interests in Europe and the Middle East are forming grey clouds over the economic horizon. Also, big bud fasten media advertising, with the exception of outdoor advertising, is invariably slender at socio-economic class-end when readership and viewership are traditionally down due to a lack of new programs and major sporting events.Consumers are usually on vacation or out holiday shopping at class-end, quite than at home reading or sitting in front of the box, giving media advertising less reach. However, prudent companies are certified that a prolonged advertising drought can adversely imply brand recall and consequently spell slower product movement. Thus, although advertising revenue appends were more modest than expected in 2003, with the exception of short letter boob tube, syndication and Spanish ne twainrk components. This income source is predicted to grow in 2004.As duration Warner moves forward with these external challenges, the foundation of their strategy is to invest our financial resources in a disciplined manner to provide the best possible withdraw to their ploughshareholders. This means focusing on the right backupes. Their board of directors and management constantly evaluate Time-Warners business organisationes to ensure that they meet their standards for fina ncial performance, maturation and return on investment.Industry OverviewThe United States market for course and satellite TV serve has grown by 6.5% since 2003 to reach a value of US$57.6 billion in 2004. Over 2001 to 2005, value trades increased by 36.5%. Over 73 million American households subscribed to cable picture services with 34% of them having digital service in 2004. In 2004, the average monthly price for expanded primary programming packages was US$38.23. artificial satellite TV services are expected to continue to increase in popularity. Satellite TV is heading aggressive pricing packages relative to cable, an increasing number of special interest channels and local channels in all markets.Local channels were previously unavailable to subscribers. Despite the people of satellite TV, Time Warners networks and cable segments have been banknote unvarying revenue growth in youthful classs. Revenue from the networks segment increased from $8,434 million in 2003 t o $9,611 million in 2005, representing a growth rate of 7%. Revenue from the cable division increased from $7,699 million in 2003 to $9,498 million in 2005, representing a growth rate of 11%.These two segments together contribute more than 42% of the total revenues of the keep fellowship. Increasing metameric revenues have contributed in the partys overall revenue growth of 3.7% in pecuniary 2005 over fiscal 2004. This is why cable television pass on likely continue to baffle healthy revenue growth for owners of those networks, though gains may well be slower than over the erstwhile(prenominal) several categorys. Beneficiaries of ongoing strength in cable include Viacom, Time Warner, cleans Corp. and Disney.The most significant changes in the media industry in the knightly decade have been in its adoption of the internet technology. The internet has evolved from universe just a communications tool to change state an cardinal entertainment, business and marketplace platf orm. Catching up is the cable segment, which is embracing broadband technology in earnest and is rapidly overtaking the role of traditional dialup technology in supplying telephony and especially internet services to northernmost American homes.From 1996 through 2003, the US cable industry spent $75 billion in private capital on plant and equipment as well as infrastructure upgrades, according to NCTA. The cable industry in its totality is moving from analog to digital technology to compete with the high-quality, low-interruption subscribe transmission dispel by DBS companies, which have been offering high quality, encrypted digital transmission almost since day one. The competition between cable and satTV is becoming more intense. Apart from normal TV programs and movie line-ups, both offer interactional (cable TV cosmos a recent entrant) and internet technologies on their systems.Both are taking the TV experience to new heights. not only can the viewer play interactive games on TV but they can also interact with programs they are watching, for example responding to interactive surveys or making immediate purchases on shopping channels via the outside(a) control. Latest technological advancements also allow viewers to record, pause, forward and reverse live programs or watch them in slow motion or instant replay using digitalpersonal video transcription (DVR or PVR) and video on demand (VoD) devices for satTV and cable TV, respectively.Unfortunately, the digital innovation is bringing problems to some in the industry. Content and program providers are eager over the dent DVRs and VODs may make in their win. How serious their concerns are remain to be seen, but observers of the industry are noting that a herald of DVRs and VODs, the VCR, was greeted with the corresponding(p) disquietude, which was soon replaced with blithe in exit as the technology propagated a new earning capacity, that is, the sale of videos.An issue that bothers media executives is their loss of control over viewers. viewing audience can replay scenes they like during a commercial break, thus in effect bypassing messages from advertisers, who happen to be program sponsors. This could force advertisers to see TV as a less effective advertising channel than it used to be and bankrupt them better leverage at commercial slot price negotiation or cause them to adopt other advertising media.As viewers become more discerning, they are demanding greater viewing assortment and higher quality programs. They are also getting hi-tech, seeking a greater, more interactive TV viewing experience frequently as they have come to expect from their personal computers. The FCC, the federal regulator for the media and telecommunications industry, is aware(p) of this and is pushing the industry to hurry the digital transition. The FCC has mandated that all TV broadcast stations have High Definition TV (high-definition television) broadcasting talent by 2006. This exit mean a bigger outlay for broadcasters and cable companies in the coming few yearsBroadcasters and program networks leave have to invest in new cameras, titling and editing equipment and tape machines that support the digital TV (DTV) format and revamped rigs for DTV friendly TV vans.Cable operators need to interchange all their equipment and set-top boxes. However, for viewers with HDTVs, the set-top boxes are bypassed.Time Warner had responded to this challenge through Warner Bros Entertainment, a subsidiary of the company when it tied up with CBS weed to form a new broadcast network. This new network, The CW, to be launched in late 2006, can significantly expand Time Warners customer base.Time Warners Cartoon internetwork channel entered into a joint approximate with VIZ Media to form Toonami Jetstream, a new broadband service to provide streaming episodes of spiritedness series. Toonami Jetstream will allow users to view episodes of Cartoon Network in their own time and also pr ovide an alternative distribution vehicle for Time Warner. These alliances and joint proceeds can provide Time Warner with a competitive favour over its peers and enable it to enhance its revenue position.Expanding broadband market nigh players in the cable industry have begun the digital journey but consumers may still 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 range 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 decision as bad news for democracy and local content. The new rule, which allowed media companies to have US penetration cap of 45% instead of the old 35%, was good news to media giants who were operational 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, arrive at 41% of the total national 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 community would be dominated by that entity. This would threaten local content in the communitys media. However, the 45% rule was close up by Congress in a massive cd to 21 vote in July 2003. This was followed by a stay order by a federal court some few weeks later.Should the FCC fail to ingathering 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 War ner, which garners some revenues from films, should grow its studio advantages well. It is let go several DVDs of popular titles. Film profits generally sway on the timing of releases. Viacom, Disney, and Dreamworks Animation also have large offices in the sector, which will likely move further towards home viewing via digital cable and the Internet.Having many cities that are highly cosmopolitan, the US has various nonage and ethnic groups which are looking for more than just generic programs that do not necessarily depict their lifestyles or cater to their tastes. Many nonage group communities 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 ascertained 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. Prev iously, being culture sensitive meant placing non-Caucasian actors in supporting roles but, belatedly, major media companies are dedicating self-colored TV and audio 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 from 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 million over the review period, to account for 2.8% of sales in 2004. In 2004, premium channels accounted for US$9.5 billion, or 16.5% of the market, realizing 13% growth. Cable TV continues to dominate the premium TV market with 76 percent of households and its market penetration is still increasing.Table 2. United States Media Market Sectors US$ billion20002004Advertising8.515.9Basic services24.130.6Pay-per-view movies1.21.6Premium channels8.49.5 seed Euromonitor externalIn terms of pe rformance, Comcast Corporation was the allureer of cable and satellite TV services in the United States in 2004 with 32% market share. It keep its leaders position through product innovation and differentiation including its ON DEMAND offerings, increased regional sports programming and its leading Comcast.net portal. Time Warner Inc had the atomic number 16 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 pictorial matter Recorder, Wireless Home Networking, and Digital Telephony service. Through expansion of its US market, Cox Communications Inc. increased its market share by 7.7% from 2003 to 9.7% in 2004. Charter Communications saw its market share moderate to 9.3% in 2004.Table 3. United States Media Market function % value of market sector2004Comcast Corporation32.0AOL Time-Warner I nc17.2Charter 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 pulling out of an ambitious, four-year theater venture in the country because of tightened restrictions on foreign ownership. The decision was announced in November 2006 came after its Warner Bros. unit tried unsuccessfully for more than a year to negotiate a compromise with the Chinese government over a July 2005 ruling requiring outside investors to cede control in ventures to their Chinese partners. Warners decision underscores Hollywoods frustrations operating in China. Although studio executives reckon China to be the worlds best growth luck for U.S. entertainment, they also are wary of expanding there, in part because of what they believe are burdensome government rules.Although the media market is fraught with competitors, Time Warner had been a formidable competitor beca use it offers diversified, yet complimentary products and services. The company 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 aforesaid(prenominal) content in various formats to generate additional sales. Its wide product portfolio has also allowed the company to offer first-class bundles to the customers.Company 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 brands. 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 million subscribers in the US and 6 million in Europe at the last count. Time Warners cable business, Time Warner Cable (TWC), is the se cond-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 equity of its brands to generate sales. bran-new developments continue to stream in Time-Warner. In 2004, Time Warner Cable announced the creation of a new business unit, Time Warner Cable Voice Services. This creation was responsible for overseeing the rollout of its residential call up service, known as Digital Phone. During the same year, AOL Europe, and Google, announced a new multi-year agreement 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 New Line Cinema to form Picturehouse. AOL announced the acquisition of Weblogs, a blogging company. AOL also acquired an online digital music subscription company called MusicNow in November 2005. During the same month the company, along with several other cable companies concluded an agreement with Sprint. According to the agreement, the companies would form a joint venture for providing wireless and wireline entertainment product.AOL acquired Truveo, a innovate in internet video searching 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 declination 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 total revenues. Time Warner generates revenues through its five business divisions record entertainment (26.4% of total revenue during fiscal year 2005), networks (21.3%), cable (21%), AOL (18.3%), and publishing (12.9%).During the fiscal year 2005, the record entertainment division recorded revenues of $11,924 million, an increase of 0.6% over 2004. The networks division recorded 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 geographic 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 international countries accounted for 6.7% of the total revenues in the fi scal 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 salesFiscal yearTotal Sales20033956520044208 9200543652Profitability Ratios2007*2006*20052004 2003SalesGross borderOperating Margin (%)Pre-Tax Margin (%)Net Profit Margin (%)Accounts payableNet ExpensesInventoriesRevenues per shareCash-Flow per share shekels per share465000.4308.312.931.1449000.43011.411.83.121.35436520.04326.069.376.651,380,00013,676,0001,806,0009.7051.3740.62420890.042 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 quantifyline Investment Survey).Time-Warner remains to be an otherwise bright 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 develop a way to maintain AOLs subscription service in a high-speed world, management finally threw in the towel 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 offset subscription losses. Still, this property is an important part of the companys overall collection of media- cogitate businesses.Moreover, the performance of the filmed entertainment segment and AOL segment has been weak in the past triplet years. Revenue from the filmed entertainment segment grew by as gnomish 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 ground to its competitors.The reason for this projection and forecasts is that TWX remains to be garnering operating profit. Although 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 margin 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 equal the companys long term financial position. Declining cash from operating activities Time Warners cash flows from operations have been declining in recent years. Cash from operations have declined from $6,601 million in fiscal year 2003 to $4,965 million in 2005. Declining cash flows can force the company to take up external capital to fund its growth pl ans, which could prove to be expensive.TWXDividend invest Per circumstances ($)Shares Outstanding (M)Ave. Daily Volume (M)BetaShareholdersMarket detonator ($M)Institutional Holdings (%)Yield (%)12-month P/E 0.223972.5823.442.032956,50083066.572124.6We can use the dividend discount model to estimate the cost of common germinate. The difference between common stock and preferred stock is in our self-confidence rough the growth pattern of future dividends. With common stock, we typically necessitate that dividends grow at a constant rate into perpetuity. Then we can write 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 paid out about 40 percent of its earnings as dividends. Therefore, with a forecast 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 Rates and AveragesPast Growth Rate (%)1 Year3 long time5 Years9 YearsSales3.712.5629.0549.46Net Income-9.47Ratio Analysis (Annual Average)Net Margin (%)6.657.41LTD of Capitalization (%)19.4821.0120.7121.15Return on Equity (%)4.715.328.18Pricing/EarningsRecent monetary value20.14P/E Ratio15.612P/E (Trailing)14.183P/E (Median)NMFRel. P/E Ratio0.724RatingsFinancial postureB++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 = 183.88Sum = Value of the Total Corporation = $234.85 millionLess MV of Debt and Preferred = $202 millionValue of vulgar Equity = 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 cash 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 flows leads to a 53.28% decline in the value per share. As of phratry 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% conversion 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 repurchase about $15 billion of its shares in 2006, and the ending in 2007. Over the longer term, the company targets a 3X leverage ratio. TWX began salaried 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 detachment of its cable joint venture with Comcast.TWX undertook several asset divestitures in the past few years 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 Comedy Central ($1.2 billion), a DVD/CD manufacturing business ($1 billion), and two NBA and NHL professional sports teams (undisclosed). Also, in 2006, TWX sold its book publishing business for $532 million in cash, and its Turner South network for about $375 million in cash. TWX also raised $239 million from the sale of stock in Time Warner Telecom.