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
- Fund a fix amount of debt, which could either be kept in perpetuity or
paid down gradually. - 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 | |
| Sales | 22500 |
| EBITDA | 2500 |
| Depreciation | 1100 |
| Operating profit | 1400 |
| Net Income | 660 |
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
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 |
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The link isn't working. Would you please upload it to a mirror. I'm interested in this case study. Thank you.
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