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Sampa Video Solution Harvard Case Solution 1

The documents provide financial projections for Sampa Video Inc. and the proposed home delivery project. Sampa Video had $22.5 million in sales and $660k in net income in 2000. The home delivery project is projected to increase annual sales by $1.2 million to $7.5 million from 2002-2006, with positive net present value using discount rates from 15.12% to 4.4%. Upfront investment of $1.5 million is required.

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Héctor Silva
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250 views10 pages

Sampa Video Solution Harvard Case Solution 1

The documents provide financial projections for Sampa Video Inc. and the proposed home delivery project. Sampa Video had $22.5 million in sales and $660k in net income in 2000. The home delivery project is projected to increase annual sales by $1.2 million to $7.5 million from 2002-2006, with positive net present value using discount rates from 15.12% to 4.4%. Upfront investment of $1.5 million is required.

Uploaded by

Héctor Silva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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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.

a
EBITDA is the Earnings Before Interest, Taxes, Depreciation and Amortization.

No. Of Stores 30
Increase in Annual Growth Revenue 10% Over 5yrs
Free Cash Flow Growth 5%
Upfront Investment Required 1.5 million
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.

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


Value of the Project f
Asset Beta 1.5
Cash Flow Growth rate 5%
Risk Free Rate of Return 5%
Market Risk Premium 7.20%
Cost Of Equity 15.80%
Initial Investment 1500
Cost Of Debt 6.80%
Project Debt Beta (βd) 0.25

Exhibit 2
Years 0 1 2 3 4
2002E 2003E 2004E 2005E
Initial Investment (1500)
Sales 1,200 2,400 3,900 5,600
EBITDa 180 360 585 840
Depreciation (200) (225) (250) (275)
EBIT (20) 135 335 565
Tax Expense 8 (54) (134) (226)
EBIATa (12) 81 201 339

CAPXb 300 300 300 300


Investment in Working 0 0 0 0
Capital

Free Cash Flow (112) 6 151 314


Discount Factor 1.00 0.86 0.75 0.64 0.56
Present Value -1500 -96.72 4.47 97.24 174.62

14.49% DF @ 14.49% 0.873439 0.762895 0.666342 0.5820091


PV -97.82514 4.577371 100.6177 182.750859
3225.89
1725.89
Total Present Value 2728.49
NPV 1228.49

Value of the Project 1228.49


of the Project for Entirely Equity based Firm

Target D/E 0.33


Target D/V 0.25
New Equity Beta 1.80
New Equity Return 17.94%

5 5
2006E Terminal Value

7,500
1,125
(300)
825
(330)
495

300
0

495 4812.50
0.48 0.48
237.72 2311.15

0.50834929213472 0.50834929213472
251.632899606685 2784.1364023922
ADJUSTED PRESENT VALUE (

Asset Beta 1.5


Cash Flow Growth rate 5%
Risk Free Rate of Return 5%
Market Risk Premium 7.20%
Cost Of Equity 15.80%
Initial Investment 1500
Cost of Debt 6.80%
Project Debt Beta (βd) 0.25
Additional Debt 750

Debt 750
Cost of Debt 6.80%
Interest Paid 51 20.4
Tax 40%
Tax Benefit 20.40 20.4
Debt Tax Shield 300 300

Present Value of Firm 1528.49


RESENT VALUE (APV) APPROACH
WACC - 25% DEBT/VA

Growth rate 5% 5% 5%
Tax Rate 40% 40% 40%
Asset Beta 1.5 1.5 1.5
Debt Beta 0.25 0.25 0.25
Cost Of Debt* 6.80% 6.80% 6.80%
Risk Free Rate (Rf) 5% 5% 5%
Risk Premium 7.20% 7.20% 7.20%
Debt 25% 50% 75%
Equity 75% 50% 25%
Equity Beta 1.92 1.83 1.75
Cost Of Equity 18.80% 18.20% 17.60%
WACC 15.12% 11.14% 7.46%

Years 0 1 2
2002E 2003E

Initial Investment (1500)


Sales 1,200 2,400
EBITDa 180 360
Depreciation (200) (225)
EBIT (20) 135
Tax Expense 8 (54)
EBIATa (12) 81

CAPXb 300 300


Investment in Working 0 0
Capital

Free Cash Flow (112) 6

Discounting Factor WACC = 15.12%) 1.000 0.869 0.755


Present Value -1500.00 -97.290 4.53

Discounting Factor WACC = 9.10%) 1.000 0.900 0.810


Present Value -1500.00 -100.77 4.86

Discounting Factor (WACC = 4.40%) 1.000 0.931 0.866


Present Value -1500.00 -104.225 5.20

25% Debt 50% Debt 75% Debt


NPV Case - 1 1469.97 3116.52 9379.56
NPV Case - 2 2040.53 4003.79 11471.49
NPV Case - 3 2687.67 5010.91 13847.90
*Note: It is Assumed that Cost of Debt Remains Same.
C - 25% DEBT/VALUE RATIO IN PERPETUITY

3 4 5 5 5 5
2004E 2005E 2006E Terminal Value Terminal Value Terminal Value
(25% Debt) (50% Debt) (75% Debt)

3,900 5,600 7,500


585 840 1,125
(250) (275) (300)
335 565 825
(134) (226) (330)
201 339 495

300 300 300


0 0 0

151 314 495 5135.87 8464.98 21128.05

0.655 0.569 0.495 0.495 0.495 0.495


98.97 178.78 244.82 2540.15 4186.70 10449.74

0.728 0.655 0.590 0.590 0.590 0.590


109.99 205.80 291.91 3028.74 4992.00 12459.70

0.806 0.750 0.698 0.698 0.698 0.698


121.68 235.47 345.44 3584.10 5907.34 14744.34

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