periodsonthetaxrateforSirius,thesatelliteradiopioneer.
Siriusreportedrevenuesof$187millionandanoperatingloss
of$790millionin 2005 andhadanaccumulatednetoperating
lossof$824millionbytheendoftheperiod.Whilethingsdo
look bleakforthefirm,wewillassume thatrevenueswill
growsignificantlyoverthenextdecadeandthatthefirm’s
pretaxoperatingmarginwillconvergeontheindustryaverage
of 20% for mature media firms. The following table
summarizesourprojectionsofrevenuesandoperatingincome
for Sirius for the next 10 years.
NotethatSiriuscontinuestolosemoneyoverthenextfour
yearsandaddstoitsnetoperatinglosses.Inyears 5 through
8,itsoperatingincomeispositivebutthecompanystillpays
notaxesbecauseofitsaccumulatednetoperatinglossesfrom
prioryears.Inyear9,itisabletoreduceitstaxableincome
by the remainingnet operating loss ($327 million), but it
beginspayingtaxesforthefirsttime(atarateof28.05%).
Weassumea35%taxrateasthemarginaltaxrateinyear 10
andbeyond.Thebenefitsofthenetoperatinglossesarethus
built into the cash flows and the value of the firm.