Sampa video Inc.

First we looked at the projected free cash flows. We established the cash flows by using
the EBIAT+depreciation-CapX-investment in NWC. The investment in NWC is
throughout the years 0 so we could also leave them out of the equation. When using this
formula the cash flows of Sampa videao inc. are for the investment year and the
following years 2002-2006 respectively -1500, -112, 6, 151, 314, 395 (thousand of dollars).
The total value is $4813 thousand(exhibit 4).

After computing the cash flows we need the discount rate. Because Sampa video inc. is
entirely equity financed we can calculate the discount rate by looking at the asset beta.
This is 1.5 (exhibit 3). To compute the appropriate discount rate we used the formula:
Risk free rate+Market risk*asset Beta (Rf+Mr*βa). The appropriate discount rate that
follows is 15.8%(exhibit 4).

Finally we can use the discount factor to compute the Net present value of Sampa video
inc if it was completely equity based which is $1228,48 thousand (exhibit 4)

The adjusted present value is the net present value plus the present value of the tax
shield. From exhibit 3 we can see that the tax rate is 40%. When the firm raises $750
thousand of debt to fund the project the Present value of the tax shield will be
$750*0,4=300 thousand. When we ad the calculation of the NPV in exhibit 4 we get a
total adjusted present value of 300+1228.5=$1528,5 thousand.

If we assume that the firm maintains a 25% Debt-to-market value ratio, our new return
on equity (Re) will be 18.05. (calculation shown below)
𝐷
Formula for return on equity: 𝑅𝑒 = 𝑅𝑎 + 𝐸 ∗ (𝑅𝑎 − 𝑅𝑑)
In this case: 𝑅𝑒 = 15.8 + 0.333 ∗ (15.8 − 6.8) → 𝑅𝑒 = 18.80%
We calculate the WACC with the next formula:
𝐸 𝐷
𝑅𝑤𝑎𝑐𝑐 = 𝑅𝑒 ∗ 𝐸+𝐷 + (𝑅𝑑 ∗ 𝐸+𝐷 ∗ (1 − 𝑡)) → 𝑅𝑤𝑎𝑐𝑐 = 18.80% ∗ 0.75 + (6.8 ∗ 0.25 ∗
(1 − 0.4)) → 𝑅𝑤𝑎𝑐𝑐 = 15.12%
After inserting this information in Excel, we got a NPV of $1469.97(in thousands)
6. The APV method is a very transparent method, because it makes a clear distinction
between the assets and financing decisions (e.g. investments) of a firm. The APV method
is also a method that calculates the Present Value of tax shields by discounting them
with a debt rate. So, the APV method is more appropriate to use in cases when a firm has
a permanent debt, so the firm can add the discounted tax shields to the value of the firm.
The APV method is also a useful method when the firm has a constant changing debt-to-
equity ratio because the capital structure of a firm is irrelevant for this method.

On the other hand, a firm can easily implement the WACC method when there
is constant value of the D/E ratio because the WACC method calculates the levered value
of the firm by discounting the free cash flows from operations with the weighted average
cost of capital. The CCF method calculates the value of the firm, by discounting the
capital cash flows (FCF+ interest tax shield) with the return on assets. This means that it
is appropriate to use the CCF or WACC method, when the debt is a fixed part of the firm’s
value. At last, if all the assumptions of the model are equal, the choice of a model should
be indifferent because the value of a firm would practically be the same.