Here, Beta of Equity would be Re WACC Free Cash Flows Terminal Value

Total Cash Flow Present Value of FCF Present Value of TV Value of the Firm

-112 -97.29

6 4.53

151 98.97

314 178.78

5630.87 244.82 2540.15

2969.97

End of Year Balances '000s) Value of the Firm Value of Debt Value of Equity $3,531 $883 $2,648 $4,059 $1,015 $3,044 $4,522 $1,130 $3,391 $4,891 $1,223 $3,668 $5,136 $1,284 $3,852

...Valuing a Business Opportunity (SampaVideo)
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...

...SampaVideo, 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 SampaVideo in the business of home delivery of movie rentals and we believe that the operations of SampaVideo 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...

...Introduction:
SampaVideo, 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...

...
SampaVideo 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...

...capital structure that consists of 40 percent common equity, 40 percent debt, and 20 percent preferred stock. The company has $1,000 in retained earnings. The company expects its year-end dividend to be $3.00 per share (D1 = $3.00). The dividend is expected to grow at a constant rate of 5 percent a year. The company’s stock price is currently $42.75. If the company issues new common stock, the company will pay its investment bankers a 10 percent flotation cost.
The company can issue corporate bonds with a yield to maturity of 10 percent. The company is in the 35 percent tax bracket. How large can the cost of preferred stock be (including flotation costs) and it still be profitable for the company to invest in all four projects?
Solutions to Problem Set Ch. 10
1. CAPM, beta, and WACC
Data given: wd = 0.3; wc = 0.7; kd = 8%; T = 0.4; kRF = 5.5%, kM - kRF = 5%.
Step 1: Determine the firm’s cost of equity using the WACC equation:
WACC = wd kd (1 - T) + wc ks
10% = 0.3 8% (1 - 0.4) + 0.7 ks
8.56% = 0.7 ks
ks = 12.2286%.
Step 2: Calculate the firm’s beta using the CAPM equation:
ks = kRF + (kM - kRF)b
12.2286% = 5.5% + (5%)b
6.7286% = 5%b
b = 1.3457 1.35.
2. Beta risk
Old assets = 1.0. New assets = 0.5. Total assets = 1.5.
Old required rate: New required rate:
18% = 7% + (5%)b 16% = 7% + (5%)b
beta = 2.2. beta = 1.8.
New b must not be greater than 1.8,...

...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...

... In the video "A Place at the Table" it showcases eight American teens discussing their ancestors trials and tribulations of what they thought would be the American dream. Their names are Wislene, Peter, Samuel, Reina, Carol, David, Terry, and Deloria.
Wislene is a descendent from Africa, her grandparents were stolen from their native land and forced into slavery in America. They were re-named and separated from each other. They had to endure social justice blatant racism and nightmares upon nightmares of brutal violence and segregation. All they wanted was to start a family, homestead some land and live what they thought was the America dream.
Peters grandparents were Japanese, they were under the impression that there was mountains of gold in America and they could come here and harvest the gold and live wonderful lives better than the current conditions they were in. When they arrived during the war they were placed into "concentration camps" and had everything taken away from them. All they wanted was to escape poverty and have a small piece of the American dream but even though his grandfather even fought in the war his family still endured social injustice.
Deloria's grandparents were Native American. Her grandmother walked from Canada to California with her child on her back and a "white man's bullet in her leg". Self transformation plays a big role in Deloria's past, Native Americans were forced into American schools to reform them into the...

854 Words |
2 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":35897452,"categoryName":"Periodicals","categoryParentId":"17","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":2,"pageRange":"1-2","totalPages":2}},"access":"premium","title":"Sampa Video Solution","additionalIds":[3,9,52,7],"additional":["Business \u0026 Economy","Entertainment","Business \u0026 Economy\/Organizations","Education"],"loadedPages":{"html":[],"text":[1,2]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/Sampa-Video-Solution-1041316.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"}}