Analysis
1. If the firm was entirely financed, we can consider its competitors, Kramer.com and Cityretrieve.com, as comparables. Through the CAPM formula, we can calculate appropriate discount rate as follows. rU=5.0%+1.50*7.2%=15.8%

The annual projected free cash flows which are presented in the Exhibit 1 are $-112,000; $6,000; $151,000; $314,000; $495,000 respectively for year from 2002 to 2006. After year 2006, the free cash flow would grow at 5%, so we can calculate the terminal value of the project at the end of 2006 using the perpetual-growth DCF formula. TV2006=FCF2007k-g=FCF2006*1.05k-g=5197500.108=$4,812,500

The value of the project is:
Vproject=-1500000+-1120001.158+60001.1582+1510001.1583+3140001.1584+4950001.1585+48125001.1585=$1,228,485

2. If the firm raises $750,000 of debt to fund the project and keeps the level of debt constant in perpetuity, we can consider the interest tax shields as a perpetuity. annual interest tax shield=750000*6.8%*40%=$20,400

In this case, we assume the risk of the interest tax shield equals the risk of the debt. rTS=rD=6.8%
PVTax Shield=204006.8%=$300,000
APV=1228485+300000=$1,528,485

3. We has known that rU=15.8%, rD=6.8%,DV=25%,EV=75%, through the formula rU=rDDV+rEEV , we can get: rE=18.8% WACC=rDDV1-Tc+rEEV=6.8%*25%*1-40%+18.8%*75%=15.12%
The terminal value of project at the end of 2006:
TV2006=FCF2007WACC-g=FCF2006*1.05WACC-g=5197500.1012=$5,135,870 Vproject=-1500000+-1120001.1512+60001.15122+1510001.15123+3140001.15124+4950001.15125+51358701.15125=$1,469,972

4. Firstly, we should calculate the present value of future free cash flows of each year. PVFuture FCF@2002=-1120001.1512+60001.15122+1510001.15123+3140001.15124+4950001.15125+51358701.15125=$2,969,972 The end-of-year debt balances, as presented in Exhibit 2, are at 25% constant rate of that year's project value.

5. The value of $1,528,485 from the APV approach is greater than the value of $1,469,972 from the WACC approach. The assumption of...

...Sampa Video, Inc.
1. What is the appropriate discount rate and the value of the project assuming the firm is going to fund it with all equity?
“The discount rate of a project should be the expected return on a financial asset of comparable risk”
To estimate Sampa Video’s cost of equity capital we used the CAPM model, in which rf refers to the risk free rate, to the market risk premium, and β to the company Beta (Table 1). Since the Beta of the company wasn’t known, we decided to use an Industry Beta as a proxy. Kramer.com and Cityretrieve.com. are both competitors of Sampa Video in the business of home delivery of movie rentals and we believe that the operations of Sampa Video are similar to the operations of its competitors. Therefore, we estimated the company’s Beta using the asset Beta for Kramer.com and Cityretrieve.com.
Thus,
To determine the value of the project we’ve used incremental Cash flow approach. (Table 2). We started by computing the Incremental Free Cash Flows (FCF) from 2001 until 2006. Then using the discount rate of 15,8%, we calculated the present value of the future Free Cash Flows until 2006.
After that, based on the assumption that after 2006 CF would grow at 5%, we estimated the terminal value of the company.
Finally, based on these assumptions, the NPV of the project would be:
1228,485
2. What is the Internal Rate of Return (IRR) of this project?
The...

...Case 1: Sampa Video Case
FBE 432 - J. K. Dietrich
January 29th, 2013
Meghan Ammon
Christina Daniele
Sarah Riley
To: Sampa Video Executive Committee
From: Team C Consultants– Meghan Ammon, Christina Daniele, Sarah Riley
Date: January 29, 2013
Subject: Sampa Video Home Delivery Expansion Analysis
Introduction
Sampa Video’s expansion into home delivery represents a tremendous business opportunity for the firm. However, before you make the initial investment this coming January, it is critical you consider the tax, risk, and revenue implications of the three proposed capital structures.
Financial Analysis – See appendix for detailed methodology and calculations
| Capital Structure | Discount Rate | Net Present Value |
Flow to Equity Approach | All Equity | R0 15.8% | $1,228,485 |
Adjusted Present Value Approach | $750k Debt in Perpetuity | Rs 15.8% | $1,528,485 |
Weighted Average Cost of Capital Approach | Debt/Market Value of .25 | RWACC 15.1% | $1,469,972 |
| 2002E | 2003E | 2004E | 2005E | 2006E |
Free Cash Flows ($ Thousands) | (112) | 6 | 151 | 314 | 495 |
Conclusions and Recommendations
If Sampa Video chooses the all equity financing option, the firm will receive the lowest net profit from the project. The unlevered cost of equity is significantly higher than the cost of debt in this scenario. Furthermore, an entirely equity-based approach denies the firm the...

...Introduction:
Sampa Video, Inc. was a local video rental store which maintained a large share of the movie rental market in Boston Massachusetts in the 90’s. The firm was looking to increase their base from those who visited the store to online ordering and delivery within the Boston area. They looked to increase their ability to grow by more than double the usual yearly growth rate for a five year span. By opening up the online and delivery service they hoped to increase their sales by 10% yearly as opposed to the actual 5% increase they were realizing. In order to do this project it was going to be very cost intense for the first month so their customers would know of this new innovative service. Sampa estimates that it will cost $1.5 Million to advertise sufficiently for the new campaign. This is the analysis which we have done for the project.
Analysis:
What is the value of the project assuming the firm was financed entirely with equity? What are the annual projected free cash flows? What discount rate is appropriate?
By discounting the perpetuity value of the 2006 cash flows, by the 15.8% discount rate for 5 years that would make the PV of dollars at just over $2,000. When we sum the NPV of the cash flows , we get the NPV for the project. By undertaking the project we can project that the company within its 5 year initial cash flows will increase its value by over $1 million.
We would estimate that the appropriate...

...
Sampa Video Valuation Case Study
Free Cash Flow Projection:
Based on all the given information and assumptions, the free cash flow projection for the company could be calculated as the table shown below (Exhibit 1, in thousands of $). The formula used for the calculation from year 2002 to 2006 is: FCF = (EBIT+Depr-Tax) + CAPX + Δ NWC. Starting at year 2007, the expected cash flow will be a growing perpetuity at an increasing rate of g=5%. Thus the terminal value could be calculated by the formula TV=C/(r-g).
Exhibit 1
2001
2002 E
2003 E
2004 E
2005 E
2006 E
2007 E
Sales
1,200
2,400
3,900
5,600
7,500
EBITD
180
360
585
840
840
Depr.
(200)
(225)
(250)
(275)
(275)
EBIT
(20)
135
335
565
565
Tax (40%)
8
(54)
(134)
(226)
(226)
EBIAT
(12)
81
201
339
339
CAPX
(1,500)
300
300
300
300
300
Δ NWC
0
0
0
0
0
FCF
(-1,500)
(112)
6
151
314
495
519.75
Project Valuation:
Scenario 1: Assuming all-equity financed.
By assuming the project is all-equity financed, the cost of equity (un-levered cost of capital) should be used as the discount rate in order to calculate the NPV of the project, because the cost of the asset will equal to the cost of equity in regardless of the capital structure. Given the information on comparable firm asset betas, a risk free rate and a market risk premium, the cost of capital is calculated as 15.8% based on the CAPM method.( rA = rE = rf + β*r(MP), rA = rE =5.0% + 1.50(7.2%) = 15.8%) Based on all the results and assumptions, the...

...Valuing a Business Opportunity (Sampa Video)
The purpose of this case assignment is to understand valuation under the APV and WACC methodologies.
On the web page accompanying Sampa is a spreadsheet which shows estimates for the first five years associated with a project to deliver videos to homes in the area. Customers will reserve videos over the web, and the company will deliver them on the appropriate day for viewing. The company will then pick up the videos and return them to inventory after viewing. The initial up front investment for the project is $1.5 million, all incurred in 2001.
At the end of the five-year start up period, management estimates that the free cash flows associated with the project will continue to grow at a 5% rate. Estimates of interest rates, and asset betas associated with two comparable companies (Cityretrieve.com and Kramer.com) are also provided in the spreadsheet.
We will address the following questions.
1. What is the value of the project assuming it is all equity financed?
Management has been studying two financing options for the project.
2. Under the first, management would borrow $750 thousand of the upfront investment and keeps the dollar amount of debt constant in perpetuity. Value the project using the APV method.
3. The other alternative is to fund the project with a target capital structure of 25% debt to total capital in perpetuity. Value the project using the WACC...