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...

...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,...

...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...

...
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...

...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...