209541799 sampa video inc case study
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Caso ResueltoTRANSCRIPT
Sampa Video, Inc.
Syndicate 2Cindy Herin 29112511Farradila Karnesia 29112527Henny Zahrani 29112551Muhammad Nurhadi W. 29112326Nisa Nuril H. 29112467Zelmi Ilham 29112532
History
• Sampa began as a small store in Harvard Square catering mostly to
students.
• The company expanded quickly, largely due to its reputation for
customer service and its extensive selection of foreign and
independent films.
• In March of 2001 Sampa was considering entering into the business of
home delivery of videos.
Expectations
• The project was expected to increase its annual revenue
growth rate from 5% to 10% a year over the next 5 years.
• Subsequent to this, the free cash flow from the home
delivery unit was expected to grow at the same 5% rate
that was typical of the video rental industry as a whole.
• Up-front investment required for delivery vehicles,
developing the necessary website, and marketing efforts
were expected to run $1.5 M.
Alternatives:1. Fund a fixed amount of debt, which would be
either 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.
Problems
How to asses the project’s debt capacity and the impact of financing decisions on value ?
What we have to do ?
Evaluate the decision via different valuation approaches...
WACC (Weighted Average Cost of Capital)
APV (Adjusted Present Value)
Adjusted Present Value
• Adjusted present value can be referred as a financial measurement used for determining an investment’s worth.
• Adjusted present value (APV) is similar to NPV. The difference is that is uses the cost of equity as the discount rate.
• This is because an assumption is made that the company is all financed through equity and leverage is zero at start. Then separate adjustments are made for all other side effects (e.g. the tax advantages of debt).
Tax Shield
• Reduction in income taxes that results from taking an allowable deduction from taxable income
• Because interest on debt is a tax-deductible expense, taking on debt creates a tax shield
WACC
• Rate expected to be provided by a company on average to all the security holders for financing its assets.
The Step.....
Figuring out Free Cash FlowsStep.
1Figuring out a discount rate
Step.
2Figuring out a terminal value
Step.
3Figuring out the NPV of all
the cash flows
Step.
4Putting it all together and figuring
out thecompany’s value
Step.
5
Figuring out Free Cash FlowsStep.
1
Free cash flow to an all-equity firm = EBIT (1 - t) + Depreciation - Capital Expenditures - Increase
in Working Capital
• Free Cash Flows are cash flows available to be paid to all capital suppliers ignoring interest rate tax shields (i.e., as if the project were 100% equity financed).
Projections (thousands of $)
2002E 2003E 2004E 2005E 2006E
Sales 1,200 2,400 3,900 5,600 7,500
EBITD 180 360 585 840 1,125
Depr. (200) (225) (250) (275) (300)
EBIT (20) 135 335 565 825
Tax 8 (54) (134) (226) (330)
EBIAT (12) 81 201 339 495
CAPX 300 300 300 300 300
∆NWC 0 0 0 0 0
2002E 2003E 2004E 2005E 2006E 2007E
(112) 6 151 314 495 519.75
Figuring out a discount rateStep.
2APV Analysis
Unlevered Cost of CapitalWe are given information on comparable firm asset betas, a risk free rate and a market risk premium.
rA = 5.0% + (7.2%)
rA = 5.0% + 1.50(7.2%) = 15.8%
The expected return on equity for an all-equity firm would be 15.8 percent. We will use this as the discount rate for the APV analysis.
Cost of Debt Capital• Cost of debt capital for the project is given as rB = 6.8% before taxes.
• Tax rate is given at 40%.
WACC Analysis
For WACC, we need to know what the target (long-term) debt-to-capital ratio for this company is. Let’s assume that it is 32 percent. That is, in the long run, this company expects to finance its projects with 32 percent debt and 68 percent equity.
Cost of equity capital• The cost of equity capital depends on the relative amount of debt in the
capital structure, i.e. your choice of a debt to value ratio.
))(1( BAcAS rrTS
Brr
)068,0158,0)(4,01(471,0158,0 Sr
1834,0Sr
)1( cBS TrBS
Br
BS
SWACC
After we find Cost of Debt Capital and Cost of equity capital, we can now calculate WACC :
137776,0WACC
)4,01)(068,0(32,0)1834,0(68,0 WACC
Figuring out a terminal valueStep.
3
Since we only have five years of cash flow, we need to put a value on all the cash flows after Year Five. Given that the Year Five cash flow is 495 and we expect it to grow at 5 percent a year, the value of all cash flows after Year Five can be calculated with the Terminal Value formula of our choice (either APV or WACC).
• Terminal Value (TV) is the present value of all future cash flows calculated at the point in time when stable growth is expected in perpetutity
APV Analysis
gr
gFCFFCFTY
A
)1(
05,0158,0
)05,01(495
FCFTY
5,4812 FCFTY
grow at 5 %Year 5 cash flow = 495
Cost of Capital = 15,8%
WACC Analysis
gr
gFCFFCFTY
WACC
)1(
05,0137776,0
)05,01(495
FCFTY
3,5921 FCFTY
grow at 5 %Year 5 cash flow
= 495
WACC = 13,8%
Figuring out the NPV of all the cash flows
Step.
4
2002E 2003E 2004E 2005E 2006E
FCF (112) 6 151 314 495
APV Analysis
2002E 2003E 2004E 2005E 2006E
FCFadjusted
(112) 6 151 314 5307,5
Add Terminal Value for year 2006E = 4812,5
Using free cash flows and discount rate 15,8 percent, we can calculate the Net Present Value using the NPV formula.
)1()1()1()1()1(5
5
4
4
3
3
2
2
1
1
AAAAA rrrrrFCFFCFFCFFCFFCF
PV
485,2728PV
)158,01()158,01()158,01()158,01()158,01(54321
5,53073141516112
PV
1500485,2728 NPV
485,1228NPV
NPV = PVUCF - Initial investment
2002E 2003E 2004E 2005E 2006E
FCF (112) 6 151 314 495
WACC Analysis
2002E 2003E 2004E 2005E 2006E
FCFadjusted
(112) 6 151 314 6416,3
Add Terminal Value for year 2006E = 5921,3
Using free cash flows and discount rate wacc 13,7776 percent, we can calculate the Net Present Value using the NPV formula.
)1()1()1()1()1(5
5
4
4
3
3
2
2
1
1
WACCWACCWACCWACCWACC rrrrrFCFFCFFCFFCFFCF
PV
2,3561PV
)138,01()138,01()138,01()138,01()138,01(54321
3,64163141516112
PV
15002,3561 NPV
2,2061NPV
NPV = PV - Initial investment
Putting it all together and figuring out the
company’s value
Step.
5For WACC, we are done with our calculation – the value of the company is $ 2.061.200For APV, however since we’ve used unlevered numbers (numbers without debt involved), we need to add the present value of the interest tax shields we get from debt interest payments.
Calculate the value of tax shield :• To calculate the value of tax shield of the firm assuming it borrows
$1.000.000 in perpetuity to fund this project.• The cost of debt is 6.8% in Exhibit 3, which is consistent with the debt
beta of .25 from Exhibit 3. Because the debt will be in place forever, the value of the perpetual shield is equal to:
• V (Tax Shield) = (Tax Rate X Debt Incurred X Cost of Debt) / Interest Rate of Debt
• V (Tax Shield) = $1.000.000 * .40 * 6.8% / 6.8% = $400.000.
Summarize The Result...
D/E (constant)
0,47
E 1,85
rE 0,183
WACC 0,138
NPV 2.061.200
Initial D/E 0.47
Debt Level
(constant)
1.000.000
rA 0,158
NPVU 1.228.485
PV Tax Shield
400.000
NPVL 1.628.485
WACC
APV
Conclusion
• Based on our asumption data, NPV using WACC method have better value than APV method.
• In WACC the effect of assets and liabilities is mixes up. Source of error is difficult to track down
• WACC is not flexible : what if debt risky?
• If Company want to keep debt to equity ratio constant as long as project time, WACC method is more accurate because the risk is not change in time.
• Using APV method, the value comes from is easier to track down.
• More flexible, just add other effect as separate term. • If the company must change radically from previous
financing term, or make radically new investment, APV method is more accurate.
Comparison...
WACC• Calculated as a blend of the cost of
debt and the cost of equity• focuses on a company's debt to
value ratio (D/V)• Calculate the discount rate for
leveraged equity (reL) using CAPM• Use this method when target of
debt-to-value ratio applied throughout the project life & debt ratio is constant
• Limitation: its calculations are bound to equity and debt financing and their calculated ratios.
APV• Separates the value of operations of
the capital structure into: the value of the firm (not counting debt) and the benefits and costs of borrowing money
• Calculate the discount rate for an all-equity firm (reU).
• Use this method when the debt level of the project is unknown throughout the project life and the debt level is constant
• APV method is more handy when projects have side effects which have other contributions on cost of capital