Sampa Video, HBS Case 9-201-094

Initial Cost $1.5 Million December 2001

Free Cash Flow Forecast
Sales
EBITD (Rev. less exp.)
Less Depreciation
EBIT
Taxes 40%
EBIAT
Depreciation (add back)
Operating Cash Flow
Less CAP EX
Less Investment in (changes in) NWC
Free Cash Flow
Terminal Value
Planned Debt to Value Ratio B/(S+B)
Implied Debt to Equity Ratio B/S
Tax Rate
Asset Beta
Debt Beta
Equity Beta
WACC

2002
1200000
180000
200000
-20000
8000
-12000
200000
188000
-300000
0
-112,000.00
0.73
2.703703704
0.4
1.5
0.25
3.53
0.111864

2003
2004
2005
2400000
3900000
5600000
360000
585000
840000
225000
250000
275000
135000
335000
565000
-54000
-134000
-226000
81000
201000
339000
225000
250000
275000
306000
451000
614000
-300000
-300000
-300000
0
0
0
6,000.00 151,000.00 314,000.00

This is the choice variable. When a proportion of debt is chos

unlevered cost of capital

Cost of Debt capital
Cost of (levered) Equity Capital

NPV of FCFs
Present Value of forecasted FCFs - WACC
510,739.44
-989,260.56 Also look at the "discounted payback period"
Present Value of the Terminal Value
4,944,224.21
Why is that an important variable in this decision?
Total Value
5,454,963.65
Net Present Value
3,954,963.65
Implied Initial Amount of Debt
3,982,123.47
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
8,401,493.60
e. When a proportion of debt is chosen the WACC is the easier method to apply.

0.158
0.068
0.304

the "discounted payback period"

an important variable in this decision?

Sampa Video, HBS Case 9-201-094

Initial Cost $1.5 Million December 2001
Free Cash Flow Forecast
Sales
EBITD (Rev. less exp.)
Less Depreciation
EBIT
Taxes 40%
EBIAT
Depreciation (add back)
Operating Cash Flow
Less CAP EX
Less Investment in (changes in) NWC
Free Cash Flow
Unlevered Terminal Value at 2006
Unlevered Cost of Capital
PV of Forecast period FCFs - rA
PV of Terminal Value
Unlevered Present Value of All FCFs
Unlevered NPV
Planned Level of Debt Financing
Tax Shields
Terminal Value of Tax Shields
Cost of Debt Capital
PV of Tax Shields - rB
PV of Terminal Value of Tax Shields
Total Present Value of Tax Shields
Total Net Present Value of Project
Total Value of Project
Implied Initial Debt to Value Ratio
Interest Payments

2002
1200000
180000
200000
-20000
8000
-12000
200000
188000
-300000
0
-112,000.00

2003
2400000
360000
225000
135000
-54000
81000
225000
306000
-300000
0
6,000.00

2004
3900000
585000
250000
335000
-134000
201000
250000
451000
-300000
0
151,000.00

2005
5600000
840000
275000
565000
-226000
339000
275000
614000
-300000
0
314,000.00

0.158
417,336.08
2,311,149.00
2,728,485.09
1,228,485.09
1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00
27,200.00
27,200.00
27,200.00
27,200.00

0.068
112,125.15
287,874.85
400,000.00 Note: this is equivalent to the 40% tax rate times the amount of debt ch
1,628,485.09
3,128,485.09
0.319643525
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)

0% tax rate times the amount of debt chosen ($1,000,000)

68,000.00