Sampa video Inc.

First we looked at the projected free cash flows. We established the cash
flows by using the EBIAT+depreciation-CapX-investment in NWC. The
investment in NWC is throughout the years 0 so we could also leave them
out of the equation. When using this formula the cash flows of Sampa
videao inc. are for the investment year and the following years 2002-2006
respectively -1500, -112, 6, 151, 314, 395 (thousand of dollars). The total
value is $4813 thousand(exhibit 4).
After computing the cash flows we need the discount rate. Because Sampa
video inc. is entirely equity financed we can calculate the discount rate by
looking at the asset beta. This is 1.5 (exhibit 3). To compute the
appropriate discount rate we used the formula: Risk free rate+Market
risk*asset Beta (Rf+Mr*a). The appropriate discount rate that follows is
15.8%(exhibit 4).
Finally we can use the discount factor to compute the Net present value of
Sampa video inc if it was completely equity based which is $1228,48
thousand (exhibit 4)
The adjusted present value is the net present value plus the present value
of the tax shield. From exhibit 3 we can see that the tax rate is 40%. When
the firm raises $750 thousand of debt to fund the project the Present value
of the tax shield will be $750*0,4=300 thousand. When we ad the
calculation of the NPV in exhibit 4 we get a total adjusted present value of
300+1228.5=$1528,5 thousand.
If we assume that the firm maintains a 25% Debt-to-market value ratio,
our new return on equity (Re) will be 18.05. (calculation shown below)
D
Formula for return on equity: =Ra+ ( RaRd)
E
In this case: =15.8+0.333(15.86.8 ) =18.80 %
We calculate the WACC with the next formula:
E RdD
Rwacc=
+(
( 1t )) Rwacc=18.80 0.75+(6.80.25(10.4 ))
E+ D
E+ D
Rwacc=15.12 %
After inserting this information in Excel, we got a NPV of $1469.97(in
thousands)

6. The APV method is a very transparent method, because it makes a clear

distinction between the assets and financing decisions (e.g. investments)
of a firm. The APV method is also a method that calculates the Present
Value of tax shields by discounting them with a debt rate. So, the APV
method is more appropriate to use in cases when a firm has a permanent
debt, so the firm can add the discounted tax shields to the value of the
firm. The APV method is also a useful method when the firm has a
constant changing debt-to-equity ratio because the capital structure of a
firm is irrelevant for this method.
On the other hand, a firm can easily implement the WACC method when
there is constant value of the D/E ratio because the WACC method
calculates the levered value of the firm by discounting the free cash flows
from operations with the weighted average cost of capital. The CCF
method calculates the value of the firm, by discounting the capital cash
flows (FCF+ interest tax shield) with the return on assets. This means that
it is appropriate to use the CCF or WACC method, when the debt is a fixed
part of the firms value. At last, if all the assumptions of the model are
equal, the choice of a model should be indifferent because the value of a
firm would practically be the same.