Sampa Video Valuation Case Group 2
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 NPV of the project assuming all-equity financed turned out to be $1,228.49 (in thousands of dollars), as is calculated below in Exhibit 2.
Exhibit 2
2001
2002 E
2003 E
2004 E
2005 E
2006 E
All Equity Financed
Terminal Value (TV)
4812.50
Discounted CFs
(1,500)
(96.72)
4.47
97.24
174.62
237.72
PV of TV
2311.15
NPV
1,228.49
Scenario 2: Assuming $750,000 fixed debt and perpetual.
Under this scenario, the APV method is useful and appropriate to use because the debt of the project is fixed
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 NPV of the project assuming all-equity financed turned out to be $1,228.49 (in thousands of dollars), as is calculated below in Exhibit 2.
Exhibit 2
2001
2002 E
2003 E
2004 E
2005 E
2006 E
All Equity Financed
Terminal Value (TV)
4812.50
Discounted CFs
(1,500)
(96.72)
4.47
97.24
174.62
237.72
PV of TV
2311.15
NPV
1,228.49
Scenario 2: Assuming $750,000 fixed debt and perpetual.
Under this scenario, the APV method is useful and appropriate to use because the debt of the project is fixed