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Sampa Video, HBS Case 9-201-094

Initial Cost \$1.5 Million December 2001

Free Cash Flow Forecast
2002 2003 2004 2005
Sales 1200000 2400000 3900000 5600000
EBITD (Rev. less exp.) 180000 360000 585000 840000
Less Depreciation 200000 225000 250000 275000
EBIT -20000 135000 335000 565000
Taxes 40% 8000 -54000 -134000 -226000
EBIAT -12000 81000 201000 339000
Depreciation (add back) 200000 225000 250000 275000
Operating Cash Flow 188000 306000 451000 614000
Less CAP EX -300000 -300000 -300000 -300000
Less Investment in (changes in) NWC 0 0 0 0
Free Cash Flow -112,000.00 6,000.00 151,000.00 314,000.00
Terminal Value
Planned Debt to Value Ratio B/(S+B) 0.32 This is the choice variable. When a proportion of debt is cho
Implied Debt to Equity Ratio B/S 0.470588235
Tax Rate 0.33
Asset Beta 1.5 unlevered cost of capital
Debt Beta 0.25 Cost of Debt capital
Equity Beta 1.89 Cost of (levered) Equity Capital
WACC 0.1413152
NPV of FCFs
Present Value of forecasted FCFs - WACC 448,709.88 -1,051,290.12 Also look at the "discounted payback period"
Present Value of the Terminal Value 2,939,161.28 Why is that an important variable in this decision?
Total Value 3,387,871.16
Net Present Value 1,887,871.16
Implied Initial Amount of Debt 1,084,118.77
Note: the two valuation methods are not exactly equivalent since the FCF's are not a level perpetuity
2006 2007
7500000
1125000
300000
825000
-330000
495000
300000
795000
-300000
0
495,000.00 519,750.00
5,691,823.49
e. When a proportion of debt is chosen the WACC is the easier method to apply.

0.158
0.068
0.186376471

the "discounted payback period"

an important variable in this decision?

el perpetuity
Sampa Video, HBS Case 9-201-094

Initial Cost \$1.5 Million December 2001

Free Cash Flow Forecast
2002 2003 2004 2005
Sales 1200000 2400000 3900000 5600000
EBITD (Rev. less exp.) 180000 360000 585000 840000
Less Depreciation 200000 225000 250000 275000
EBIT -20000 135000 335000 565000
Taxes 40% 8000 -54000 -134000 -226000
EBIAT -12000 81000 201000 339000
Depreciation (add back) 200000 225000 250000 275000
Operating Cash Flow 188000 306000 451000 614000
Less CAP EX -300000 -300000 -300000 -300000
Less Investment in (changes in) NWC 0 0 0 0
Free Cash Flow -112,000.00 6,000.00 151,000.00 314,000.00
Unlevered Terminal Value at 2006
Unlevered Cost of Capital 0.158
PV of Forecast period FCFs - rA 417,336.08
PV of Terminal Value 2,311,149.00
Unlevered Present Value of All FCFs 2,728,485.09
Unlevered NPV 1,228,485.09
Planned Level of Debt Financing 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00
Tax Shields 27,200.00 27,200.00 27,200.00 27,200.00
Terminal Value of Tax Shields
Cost of Debt Capital 0.068
PV of Tax Shields - rB 112,125.15
PV of Terminal Value of Tax Shields 287,874.85
Total Present Value of Tax Shields 400,000.00 Note: this is equivalent to the 40% tax rate times the amount of debt ch
Total Net Present Value of Project 1,628,485.09
Total Value of Project 3,128,485.09
Implied Initial Debt to Value Ratio 0.319643525

Interest Payments 68,000.00 68,000.00 68,000.00 68,000.00

2006 2007
7500000
1125000
300000
825000
-330000
495000
300000
795000
-300000
0
495,000.00 519,750.00
4,812,500.00

1,000,000.00 When a dollar amount of debt is chosen use the APV

27,200.00 0 Rate of Decline for the Debt Level
400,000.00 (if you want to build one into the analysis)

68,000.00