Sample Video case study

Follow the introduction.

Do all five questions and give the explanation.

Do not just write number in the excel and Put fomulas in the sells.

Advanced Corporate Finance I
Professor Yaron Leitner
Sampa Video
The purpose of this assignment is to practice a DCF analysis (Lectures 2-7) and prepare for class
discussion.
You need to submit a spreadsheet with your answers to the following questions. For your
convenience, the case exhibits data are in a file on canvas. Question 4 is optional.
Questions:
1. Estimate the project’s incremental FCF for 2002-2006, using the projections in Exhibit 2 (see
also the optional material below). 1
For the remaining questions, assume that after 2006, the incremental FCF will grow at 5%.
2. What is the project’s NPV if it is financed only with equity?
3. What is the project’s NPV under the assumption that the firm will raise $750K of debt to
fund the project and pay this debt gradually over five years according to the debt schedule
below?
(000 $)
Debt level (end of year)
2001
750
2002
600
2003
450
2004
300
2005
150
2006
0
4. (optional) What is the project’s NPV under the assumption that the firm will raise $750K of
debt to fund the project and keep this debt level constant in perpetuity?
5. What is the project’s NPV under the assumption that the firm will continuously adjust its
debt level to maintain a target D/V ratio of 25%? How much money will the firm need to
borrow initially to maintain this target ratio?
1
Earnings before interest after tax (EBIAT) is the same as “unlevered net income” in the textbook formula.
Advanced Corporate Finance I
Professor Yaron Leitner
Optional material
According to the case, the company expected that the project would increase its annual
revenue growth rates from 5% to 10% a year over the following 5 years. How did they obtain
the incremental sales in Exhibit 2?
Assume that the sales figure in Exhibit 1 is a projection for 2001. Then without the project, sales
are expected to increase 5% per year (first line in the table below). With the project, sales are
expected to increase 10% (second line). The difference between these two lines is the
incremental sales from the project, which are roughly the same as the projections in Exhibit 2.
Year
Sales grow 5%
Sales grow 10%
Incremental sales
2001
22500
2002
23625
24750
1125
2003
24806
27225
2419
2004
26047
29948
3901
2005
27349
32942
5593
2006
28716
36236
7520
Sampa Video, Inc.
Harvard Business School Case #201-094
Case Software XLS-123
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be
reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording or otherwise—without the permission of Harvard Business
School.
Exhibit 1 Summary Financial Information on Sampa Video, Inc., 2000 (in thousands of dollars)
Sales
EBITDA
Depreciation
Operating Profit
Net Income
Source: Casewriter estimates.
FY 2000
22,500
2,500
1,100
1,400
660
Exhibit 2 Projections of Incremental Expected Sales and Cash Flows for Home Delivery
Project 2002-2006 (in thousands of dollars).
Sales
2002E
1,200
2003E
2,400
2004E
3,900
2005E
5,600
2006E
7,500
EBITDA
Depreciation
EBIT
Tax Expense
EBIATa
180
(200)
(20)
8
(12)
360
(225)
135
(54)
81
585
(250)
335
(134)
201
840
(275)
565
(226)
339
1,125
(300)
825
(330)
495
CAPXb
Investment in Working Capital
300
0
300
0
300
0
300
0
300
0
Source: Casewriter estimates.
EBIAT is the Earnings Before Interest and After Taxes. Taxes calculated assuming no interest expense.
b
Annual capital expenditures of $300,000 were in addition to the initial $1.5 million outlay, and are assumed to
remain constant in perpetuity.
Exhibit 3 Additonal Assumptions.
Risk-free Rate (Rf)
Project Cost of Debt (Rd)
5.0%
6.8%
Market Risk Premium
Marginal Corporate Tax Rate
Project Debt Beta (βd)
7.2%
40%
0.25
Asset Beta for Kramer.com and Cityretrieve.com
1.50
Source: Casewriter estimates.