DUKE UNIVERSITY

Fuqua School of Business

FINANCE 351 - CORPORATE FINANCE
Sampa Video, Inc.
Prof. Simon Gervais Fall 2011 Term 2
In this case, you have to assess the viability of the home-delivery project that Sampa Video is
considering. You are asked to do your analysis using WACC, and then using APV. In both cases,
you can use the data in Exhibit 2 to calculate the free cash ows of the project. Assume that these
free cash ows will grow at 5% per year in perpetuity following the year 2006; that is, if you calculate
the free cash ow to be FCF
2006
in 2006, the unlevered free cash ow will be FCF
2006
(1.05)
t2006
in year t = 2007, 2008, . . .
When calculating the projects value using WACC, assume that the target debt-to-value ratio of
the project is 25%, that the debt will be permanent (i.e., never rebalanced), and that the rm will
borrow at a rate of 6.8%, as suggested in Exhibit 3.
When calculating the projects value using APV, assume that Sampa Video will initially borrow
$1.5 million at a rate of 6.8% to start the project. However, assume that at the end of every year
for the rst ve years, Sampa Video will repay $150,000 in principal (in addition to the interest
on the outstanding loan) and reduce the value of the outstanding loan to $750,000 at the end of
2006. After that, assume that Sampa will keep the debt at that level (of $750,000 outstanding) in
perpetuity.
For your calculations with both WACC and APV, do your analysis with two dierent assumptions
for the projects asset beta.
1. First do your analysis using the estimate of the projects asset beta provided in Exhibit 3
(
p
A
= 1.50).
2. Then repeat your analysis using the return data on comparable rms contained in a separate
spreadsheet that you can download from the course schedule at www.duke.edu/

sgervais.
This spreadsheet contains monthly return data from January 1996 through December
2000 for two comparable rms, Flixbuster and Netblock, and for the S&P500 index
(which you can use as the market portfolio).
To estimate the equity beta of the comparable rms, you will need to run a regression
for each. As before, only the slope of each regression is useful for your analysis (i.e.,
there is no need to calculate/report on anything else).
For unlevering purposes, assume that
Flixbuster has a debt beta of 0.30 and a debt-to-equity ratio of 0.48,
Netblock has a debt beta of 0.35 and a debt-to-equity ratio of 0.65,
and that these rms debt is permanent (i.e., never rebalanced).
1
Use a straight average of the comparable rms asset betas to estimate the asset beta of
the project.
To make your analysis a bit easier, let us agree on the following general assumptions for the valuation
of the project.
Assume that the end of 2001 is time 0. Assume that the initial investment of $1.5 million in
the project is made at that time.
Use the risk-free rate provided in Exhibit 3, i.e., use r
f
= 5.0% throughout.
Use the market risk premium provided in Exhibit 3, i.e., use r
m
r
f
= 7.2% throughout.
When levering/unlevering betas, do not assume that debt betas are zero.
Assume that the 40% corporate tax rate provided in Exhibit 3 applies to Sampa and to both
comparable rms.
Assume that Sampa is otherwise very protable, i.e., assume that losses on the new project
will be used to shield its prots from other projects.
Do not pay attention to the two debt options mentioned in the cases last paragraph.
Ignore the data in Exhibit 1.
The rst page of your report should be an executive summary similar to that on the last page of
this handout. In fact, such a page is included in the spreadsheet that contains the comparable
rms data; feel free to use it. The rest of your report (1-2 pages of text, 1-2 pages of spreadsheet
exhibits) should include more details about your work. As usual, please make sure that this is
presented in legible fashion so that your report can be graded eciently and accurately.
2
Last name:
First name:
Section:
Sampa Video, Inc.: Executive Summary
1) WACC with
A
= 1.50
Project D/E = ???

E
= ???
r
E
= ???
WACC = ???
2001 2002 2003 2004 2005 2006
Initial Investment ???
Annual UFCF ??? ??? ??? ??? ???
Terminal Value ???
Total UFCF ??? ??? ??? ??? ??? ???
Project's NPV ???
2) APV with
A
= 1.50
r
A
= ???
NPV
U
2001 2002 2003 2004 2005 2006
Initial Investment ???
Annual UFCF ??? ??? ??? ??? ???
Terminal Value ???
Total UFCF ??? ??? ??? ??? ??? ???
Project's NPV
U ???
PV(Interest Tax Shields)
2001 2002 2003 2004 2005 2006
Annual Interest TS ??? ??? ??? ??? ???
Terminal Value of ITS ???
Total Interest TS ??? ??? ??? ??? ???
PV(debt tax shields) ???
APV = ???
3) Analysis Using Comparables
Flixbuster Netblock

E
= ??? ???

D
= ??? ???
D/E = ??? ???

A
= ??? ???
Comp's
A
=
???
4) WACC with Comparables 5) APV with Comparables
Project D/E = ??? r
A
= ???

E
= ??? NPV
U
= ???
r
E
= ??? PV(TS) = ???
WACC = ??? APV = ???
NPV = ???
FINANCE 351
Fall 2011 - Term 2
Individual Assignment #2