Academic journal article Journal of Contemporary Athletics

A Method for the Financial Valuation of National Collegiate Athletic Association Football Bowl Subdivision Programs

Academic journal article Journal of Contemporary Athletics

A Method for the Financial Valuation of National Collegiate Athletic Association Football Bowl Subdivision Programs

Article excerpt


While the S&P 500 lost 32% of its value from 2007-2009, the programs of the National Collegiate Athletic Association's (NCAA) Football Bowl Subdivision (FBS) gained a total holding period return of 8.4%. Because the FBS is now a multi-billion dollar industry (White, 2011), these returns translate into millions of dollars in profits, similar in proportion to the recent financial success enjoyed by National Football League (NFL) franchises (Gratton & Solberg, 2007). Overall, Walsh and Giulianotti (2001) found that sports in general within North America were increasingly commercialized throughout the 1990's. In confirming such findings, Ziets and Haber (2008) noted the professional teams' improving cash flow reflected by Forbes ' sport franchise valuations, which reported an annual mean growth rate of 11.7% over the period 1991 through 2006. Ziets and Haber also discussed how North American sports properties are typically valued using Price/Eamings (P/E) or Price/Revenues (P/R) multiples - which, while useful, lack theoretical financial grounding. Thus, more rigorous valuation methods are called for, including detailed Discounted Cash Flow (DCF) models.

While much of the news and data seen within the FBS industry has been suggestive of financial strength, some recent reports suggest the future may not necessarily be reflective of the past. For instance, Wolverton (2012) reported that Moody's Investor Service downgraded the Florida State University Financial Assistance revenue-bond rating. This suggests that even perennial FBS powerhouse programs such as FSU are not necessarily immune to financial recessions. In fact, FBS programs have higher investment requirements and operating costs than ever before as both FBS revenues and costs continue to escalate in unprecedented fashion. In fact, particularly in the near aftermath of severe, worldwide recession fueled by an uncontrolled price run-up in the international residential real estate mortgage industry, significant capital should not be invested into an FBS program without a better understanding of its intrinsic value.

Conceptual Framework of Intrinsic Value

According to Downes and Goodman (1998), "intrinsic value (implies) valuation determined by applying financial data inputs to a theoretical valuation model, (and) the resulting value is comparable to the prevailing market price" (p. 293). Accordingly, intrinsic value analysis reflects fair market value, which is defined within the Internal Revenue Service (1959) as, "the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts" (Section 2.02). Likely, the buyers of FBS programs would emerge from a population of individuals, partnerships, and organizations similar to the current NFL team owners, whom, collectively, would reflect a certain set of financial and economic parameters. Accordingly, this study proposes the use of financial parameters from NFL clubs to estimate the FBS programs' capital structures (Badenhausen, Ozanian, & Settimi, 2011), and thus provide part of the foundational basis for FBS program-specific risk from the view of similar buyers. Considering risk, using the current financial information available about NFL teams, a range of likely FBS program buyers' capital structures can be proposed for all FBS programs, generating a range of data inputs for determining the weighted average cost of capital for each school.

While currently most sport franchises trade based upon market evidence such as a P/E multiple (Ziets & Haber, 2008), such multiples used as tools to estimate equity value have occasionally been criticized for being neither rigorous nor accurate, while DCF has been shown to be more accurate (e.g., Levinsohn, 2010). DCF can measure intrinsic value in a more rigorous way, and has been traditionally applied to capital budgeting analysis, or to firms selling common stock or security derivatives in public markets, where a comparison is made between the market price for a given security and its fundamental intrinsic value. …

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