SAMPA VIDEO

SAMPA VIDEO
Assignment Questions
1. What is the value, and net present value of the project, if it is entirely equity financed?

2. Suppose that Sampa Video assumes a fixed level of debt of $750,000. Use the adjustedpresent value (APV) approach to determine the value, and net present value, of the project?

3. Suppose that SampaVideo assumes debt so as to maintain a debt ratio of 25% (inmarket value terms). Determine the value, and net present value, of the project using:

a. The weighted average cost of capital (WACC) approach
i. What are the implied debt levels of the project?
ii. What do the debt levels look like beyond 2006? Does it seem to growing at a constant rate?
b. The flow to equity (FTE) approach
i. What do levered cash flows look like beyond 2006? Do they seem to growing at a constant rate?
c. The capital cash flows (CCF) approach
i. What do capital cash flows look like beyond 2006? Do they seem to be growing at a constant rate?
d. The adjusted present value (APV) approach
i. What do interest tax shields look like beyond 2006? Do they seem to be growing at a constant rate?

You should confirm that the net present value of the project is the same in parts (a) – (d).
Hint: For questions 1 – 3 above, you will find it useful to forecast some of the numbers (e.g. unlevered cash flows, implied debt levels, etc.) beyond Year 2006 to Year 2008 or 2009. Keep in mind that beyond 2006, unlevered cash flows are expected to grow at a constant, perpetual growth rate of 5%.

Sampa Video, Inc.
Harvard Business School Case #201-094
Case Software XLS-123

Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.

Exhibit 1 Summary Financial Information on Sampa Video, Inc., 2000 (in thousands of dollars)

FY 2000
Sales 22,500
EBITDAa 2,500
Depreciation 1,100
Operating Profit 1,400
Net Income 660

Source: Casewriter estimates.

aEBITDA is the Earnings Before Interest, Taxes, Depreciation and Amortization.

Exhibit 2 Projections of Incremental Expected Sales and Cash Flows for Home Delivery Project 2002-2006 (in thousands of dollars).

2002E 2003E 2004E 2005E 2006E
Sales 1,200 2,400 3,900 5,600 7,500

EBITDa 180 360 585 840 1,125
Depreciation (200) (225) (250) (275) (300)
EBIT (20) 135 335 565 825
Tax Expense 8 (54) (134) (226) (330)
EBIATa (12) 81 201 339 495

CAPXb 300 300 300 300 300
Investment in Working Capital 0 0 0 0 0

Source: Casewriter estimates.

aEBITD is the Earnings Before Interest, Taxes and Depreciation. EBIAT is the Earnings Before Interest and After Taxes. Taxes calculated assuming no interest expense.
bAnnual capital expenditures of $300,000 were in addition to the initial $1.5 million outlay, and are assumed to remain constant in perpetuity.

Tax rate
sales growth rate, Years 1-5 5%
Free cash flow growth, Year 5 onwards 5%
Initial Investment 300
Initial COGS 1500

Sales 1,200
COGS 1500
EBIT
EBIT(1-t)

Exhibit 3 Additonal Assumptions.

Risk-free Rate (Rf) 5.0%
Project Cost of Debt (Rd) 6.8%
Market Risk Premium 7.2%
Marginal Corporate Tax Rate 40%
Project Debt Beta (βd) 0.25
Asset Beta for Kramer.com and Cityretrieve.com 1.50

Source: Casewriter estimates.