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Sampa Video, Inc.
Transcript of Sampa Video, Inc.
Sarah Riley Sampa Video, Inc. Sampa Video, Inc.
Case Study Cash Flow to Equity
Approach Conclusions and Recommendations Flow to Equity: NPV $1,228,490
Lowest net profit = all equity financing option
Unlevered cost of equity higher than cost of debt
Entirely equity-based approach denies tax benefits of a more balanced capital structure
Best with highly leveraged with fixed capital structure
Adjusted Present Value: NPV $1,528,490
Highest net present value
Maintains $750,000 of debt in perpetuity
Assumes B of debt is 0
Best Financing Option:
Adjust its debt to maintain constant debt to equity ratio
Weighted Average Cost of Capital: NPV $1,470,000
Most effective method to value the project
Incorporates risk of debt and equity Adjusted Present Value
Approach Weighted Average Cost of Capital Approach Sampa Video, Inc. wants to expand, entering the business of home delivery of movie rentals
Expected project would cost $1.5 million (incurred in December 2001)
Project would increase annual revenue growth rate from 5% to 10% a year over the following 5 years
After that, free cash flow would grow at the same 5% long-term rate as the industry as a whole
1. How to asses project's debt capacity?
2. Impact of financing decisions on value Financial Statements