HBS Case : Sampa Video 9-201-094

Those who have not gone through the case may read it online it's available here . I am also providing some brief details.

About Sampa Video Inc
  • Second largest in Boston area with 30 stores
  • Direct competitor Blockbuster
  • No intention to expand outside Boston
  • Customer satisfaction - key differentiator

New Business

  • Home deliery of DVDs like netflix, kramer.com and cityretrive.com
  • Will open a web site for same
  • Could lead to cannibalization
  • In long run company expect annual revenue growth rate from 5% to10% a year
    over the following five years
  • As home delivery business mature , Free Cash Flow will again grow at 5%

Problem

  • Huge Investment required
  • Company estimated up front investment of 1.5 million

Two available options

  1. Fund a fix amount of debt, which could either be kept in perpetuity or
    paid down gradually.
  2. Adjust the amount of debt so as to maintain a constant ratio of debt to
    firm value.


Exibit 1. Summary of financial information

FY 2000
Sales22500
EBITDA2500
Depreciation1100
Operating profit1400
Net Income660


Exhibit 2. Projections of Incremental expected sales and cash flows for home
delivery project





2002

2003

2004

2005

2006

Sales

1200.00

2400.00

3900.00

5600.00

7500.00

EBITD

180.00

360.00

585.00

840.00

1125.00

Depriciation

(200.00)

(225.00)

(250.00)

(275.00)

(300.00)

EBIT

(20.00)

135.00

335.00

565.00

825.00

Tax Expanse

8.00

(54.00)

(134.00)

(226.00)

(330.00)

EBIAT

(12.00)

81.00

201.00

339.00

495.00

CAPX*

300.00

300.00

300.00

300.00

300.00

Inv. in working capital

0.00

0.00

0.00

0.00

0.00

* Annual capital expenditure of $300000 were in addition to the initial $1.5
million layout and are assumed to remain constant in perpetuity

Exhibit 3. Additional assumptions

Risk free rate 5 %
Project cost of debt 6.8 %
Market risk premium 7.2 %
Corporate tax 40 %
Project debt beta 0.25
Asset beta for karmer.com and cityretrive.com 1.5

solution:


Initial Cost $1.5 Million December 2001
Free Cash Flow Forecast



2002

2003

2004

2005

2006

2007

Sales

1200000

2400000

3900000

5600000

7500000

EBITD (Rev. less exp.)

180000

360000

585000

840000

1125000

Less Depreciation

200000

225000

250000

275000

300000

EBIT

-20000

135000

335000

565000

825000

Taxes 40%

8000

-54000

-134000

-226000

-330000

EBIAT

-12000

81000

201000

339000

495000

Depreciation (add back)

200000

225000

250000

275000

300000

Operating Cash Flow

188000

306000

451000

614000

795000

Less CAP EX

-300000

-300000

-300000

-300000

-300000

Less Investment in (changes in) NWC

0

0

0

0

0

Free Cash Flow

-112,000.00

6,000.00

151,000.00

314,000.00

495,000.00

519,750.00

Terminal Value

5,691,823.49



Planned Debt to Value Ratio B/(S+B)= 0.32
This is the choice variable. When a proportion of debt is chosen the WACC
is the easier method to apply.





Implied Debt to Equity Ratio B/S

0.470588235

Tax Rate

0.33

Asset Beta

1.5

Debt Beta

0.25

Equity Beta

1.89

WACC

0.1413152


Present Value of forecasted FCFs - WACC

448,709.88

Present Value of the Terminal Value

2,939,161.28

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

unlevered cost of capital = 0.158
Cost of Debt capital = 0.068
Cost of (levered) Equity Capital=0.186

Initial Cost $1.5

Million December 2001Free Cash Flow Forecast




2002

2003

2004

2005

2006

2007

Sales

1200000

2400000

3900000

5600000

7500000

EBITD (Rev. less exp.)

180000

360000

585000

840000

1125000

Less Depreciation

200000

225000

250000

275000

300000

EBIT

-20000

135000

335000

565000

825000

Taxes 40%

8000

-54000

-134000

-226000

-330000

EBIAT

-12000

81000

201000

339000

495000

Depreciation (add back)

200000

225000

250000

275000

300000

Operating Cash Flow

188000

306000

451000

614000

795000

Less CAP EX

-300000

-300000

-300000

-300000

-300000

Less Investment in (changes in) NWC

0

0

0

0

0

Free Cash Flow

-112,000.00

6,000.00

151,000.00

314,000.00

495,000.00

519,750.00

Unlevered Terminal Value at 2006

4,812,500.00

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

1,000,000.00

Tax Shields

27,200.00

27,200.00

27,200.00

27,200.00

27,200.00

Terminal Value of Tax Shields

400,000.00

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

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

68,000.00

1 comment:

ok said...

The link isn't working. Would you please upload it to a mirror. I'm interested in this case study. Thank you.