Case solutions Sampa Video Inc.

Sampa video Inc. First we looked at the projected free cash ows. We established the cash ows by using the EI!"#depreciation$% EI!"#depreciation$%ap& ap&$investment $investment in 'W%. "he investment in 'W% is throughout the years ( so we could also leave them out of the e)uation. When using this formula the cash ows of Sampa videao inc. are for the investment year and the following years *((*$*((+ respectively $,-(( $,,* + ,-, /,0 /1- 2 thousand of dollars3. "he total value is 405,/ thousand2e6hibit 03. !fter !fter computing the cash ows we need the discount rate. ecause Sampa video inc. is entirely e)uity 7nanced we can calculate the discount rate by looking at the asset beta. "his is ,.- 2e6hibit /3. "o compute the appropriate appropriate discount rate we used the formula8 9isk free rate#:arket risk;asset eta 29f#:r;-( thousand of debt to fund the project the ?resent value of the ta6 shield will be 4>-(;(0@/(( thousand. When we ad the calculation of the '?A in e6hibit 0 we get a total adjusted present value of /((#,**5.-@4,-*5- thousand. If we assume that the 7rm maintains a *-= Bebt$to$market value ratio our new return on e)uity 29e3 will be 18.05. 2calculation shown below3 Formula for return on e)uity8

ℜ= Ra +  D ∗( Ra− Rd )  E

In this case8 ℜ=15.8 + 0.333∗(15.8 −6.8 ) → ℜ=18.80 = We calculate the W!%% with the ne6t formula8  Rwacc=  Rwacc

ℜ∗ E  Rd∗ D +( ∗( 1−t ))  E + D  E + D

C

 Rwacc

=18.80 ∗0.75 +( 6.8∗0.25∗(1 −0.4 ))

=15.12 =

!fter !fter inserting this information in E6cel we got a '?A of $1469.97 2in thousands3

C

+. "he !?A method is a very transparent method because it makes a clear distinction between the assets and 7nancing decisions 2e.g. investments3 of a 7rm. "he !?A method is also a method that calculates the ?resent Aalue of ta6 shields by discounting them with a debt rate. So the !?A method is more appropriate to use in cases when a 7rm has a permanent debt so the 7rm can add the discounted ta6 shields to the value of the 7rm. "he !?A method is also a useful method when the 7rm has a constant changing debt$to$e)uity ratio because the capital structure of a 7rm is irrelevant for this method. Dn the other hand a 7rm can easily implement the W!%% method when there is constant value of the BE ratio because the W!%% method calculates the levered value of the 7rm by discounting the free cash ows from operations with the weighted average cost of capital. "he %%F method calculates the value of the 7rm by discounting the capital cash ows 2F%F# interest ta6 shield3 with the return on assets. "his means that it is appropriate to use the %%F or W!%% method when the debt is a 76ed part of the 7rms value. !t last if all the assumptions of the model are e)ual the choice of a model should be indiGerent because the value of a 7rm would practically be the same.