counterparts. If they were, you would expect to see a
migration of traditional retailers to online retailing and
increased competition amongonline retailers on price and
products, driving the margin down.
Whilethemarginforthebusinessinwhichafirmoperates
provides atarget value,therearestilltwo otherestimation
issuesthat you needto confront. Given that theoperating
marginsintheearlystagesofthelifecyclearenegative,you
first haveto consider how the margin will improve from
current levels to the target values. Generally, the
improvementsinmarginswillbegreatestintheearlieryears
(atleastinpercentageterms)andthentaperoffasthefirm
approachesmaturity.Thesecondissueisonethatariseswhen
talking about revenue growth. Firms maybe able to post
higherrevenuegrowthwithlowermargins,butthetrade-off
hastobeconsidered.Whilefirmsgenerallywantbothhigher
revenuegrowthandhighermargins,themarginandrevenue
growth assumptions have to be consistent.
ILLUSTRATION 4.11: Estimating Operating Margins:-
Sirius
ToestimatetheoperatingmarginsforSiriusRadio,webegin
byestimatingtheoperatingmarginsofotherfirmsintheradio
business.In 2004,theaverage pretaxoperating margin for
firms in this business was approximately 20%.
10 We assume that Sirius will move toward this target
margin, with greater marginal improvements
11 intheearlieryearsandsmalleronesinthelateryears.The
followingtablesummarizes theexpectedoperating margins
and resulting operating income over time for Sirius Radio.