Sampe Video Report

(Carlotta Stefanini, Luigi Menditto, Ramina Talishinskaya)

Since the project is entirely equity financed, to compute the discount rate we used the equity beta which is
equal to the asset beta. To get the WACC we multiplied the beta with the risk premium in the first step,
then we summed it with the risk free rate. As values for the free cash flow we considered the formula:
FCF=EBIAT+DEPRECIATION-CAPEX-CHANGE IN NWC. When using this formula the cash flows of Sampa
videao inc. are for the investment year and the following years 2001-2006 respectively -1500, -112, 6, 151,
314, 395 (as it is possible to verify in pour excel file). Then we discounted the free cash flows with the
WACC that we previously computed and we got the Net present value of Sampa video inc if it was
completely equity based which is $1228,48 thousand.

Given the new Debt to market ratio, we computed the return on equity= the previous Re+(the previous Re-
Project Cost of Debt (Rd)*(new debt to market ratio-old debt to market). Therefore, the new WACC was
15.1%, which was lower than the previous one.

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 add the calculation of the NPV in
exhibit 4 we get a total adjusted present value of 300+1228.5=$1528,5 thousand.

The APV method is a very transparent method, because it makes a clear distinction between the assets and
financing decisions 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 it is more appropriate to use in cases when a firm has
a permanent debt, so the firm can add the discounted tax shields to its value. 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. The higher level of initial debt in the APV scenario will mean higher
interest payments and therefore result in a higher NPV. 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. 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. From our calculations we have higher value of
the project with the APV method and the lowest assuming that the project was entirely equity financed.