Sampa Video Solution - Harvard Case Solution

Exhibit 1 Summary Financial Information on Sampa Video, Inc., 2000 (in thousands of dollars)

Sales a EBITDA Depreciation Operating Profit Net Income

FY 2000 22,500 2,500 1,100 1,400 660

Source: Casewriter estimates. a

EBITDA is the Earnings Before Interest, Taxes, Depreciation and Amortization.

No. Of Stores Increase in Annual Growth Revenue Free Cash Flow Growth Upfront Investment Required

30 10% Over 5yrs 5% 1.5 million

Exhibit 2 Projections of Incremental Expected Sales and Cash Flows for Home Delivery Project 2002-2006 (in thousands of dollars).

Sales EBITDa Depreciation EBIT Tax Expense a EBIAT CAPXb Investment in Working Capital

2002E 1,200

2003E 2,400

2004E 3,900

2005E 5,600

2006E 7,500

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

300 0

300 0

300 0

300 0

300 0

Source: Casewriter estimates. a

EBITD is the Earnings Before Interest, Taxes and Depreciation. 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

Source: Casewriter estimates.

1.50

Value of the Project f Asset Beta Cash Flow Growth rate Risk Free Rate of Return Market Risk Premium Cost Of Equity Initial Investment Cost Of Debt Project Debt Beta (βd)

1.5 5% 5% 7.20% 15.80% 1500 6.80% 0.25

Exhibit 2 Years Initial Investment Sales EBITDa Depreciation EBIT Tax Expense EBIATa

0

2 2003E

3 2004E

4 2005E

1,200 180 (200) (20) 8 (12)

2,400 360 (225) 135 (54) 81

3,900 585 (250) 335 (134) 201

5,600 840 (275) 565 (226) 339

300 0

300 0

300 0

300 0

(112) 0.86 -96.72

6 0.75 4.47

151 0.64 97.24

314 0.56 174.62

(1500)

CAPXb Investment in Working Capital Free Cash Flow Discount Factor Present Value

1 2002E

1.00 -1500

14.49% DF @ 14.49% PV

0.873439 0.762895 0.666342 0.5820091 -97.8251 4.577371 100.6177 182.750859 3225.89 1725.89

Total Present Value NPV

2728.49 1228.49

Value of the Project

1228.49

of the Project for Entirely Equity based Firm

Target D/E Target D/V New Equity Beta New Equity Return

5 2006E

0.33 0.25 1.80 17.94%

5 Terminal Value

7,500 1,125 (300) 825 (330) 495 300 0

495 0.48 237.72

4812.50 0.48 2311.15

0.508349292 251.6328996

0.508349292 2784.136402

ADJUSTED PRESENT VALUE

Asset Beta Cash Flow Growth rate Risk Free Rate of Return Market Risk Premium Cost Of Equity Initial Investment Cost of Debt Project Debt Beta (βd) Additional Debt

Debt Cost of Debt Interest Paid Tax Tax Benefit Debt Tax Shield Present Value of Firm

1.5 5% 5% 7.20% 15.80% 1500 6.80% 0.25 750

750 6.80% 51 40% 20.40 300 1528.49

20.4 20.4 300

RESENT VALUE (APV) APPROACH

WACC - 25% DEBT/VA Growth rate Tax Rate Asset Beta Debt Beta Cost Of Debt* Risk Free Rate (Rf) Risk Premium Debt Equity Equity Beta Cost Of Equity WACC

5% 40% 1.5 0.25 6.80% 5% 7.20% 25% 75% 1.92 18.80% 15.12%

5% 40% 1.5 0.25 6.80% 5% 7.20% 50% 50% 1.83 18.20% 11.14%

Years

Initial Investment Sales EBITDa Depreciation EBIT Tax Expense EBIATa

5% 40% 1.5 0.25 6.80% 5% 7.20% 75% 25% 1.75 17.60% 7.46%

0

1 2002E

2 2003E

1,200 180 (200) (20) 8 (12)

2,400 360 (225) 135 (54) 81

300 0

300 0

(1500)

CAPXb Investment in Working Capital

(112)

Free Cash Flow

6

Discounting Factor WACC = 15.12%) Present Value

1.000 -1500.00

0.869 -97.290

0.755 4.53

Discounting Factor WACC = 9.10%) Present Value

1.000 -1500.00

0.900 -100.77

0.810 4.86

Discounting Factor (WACC = 4.40%) Present Value

1.000 -1500.00

0.931 -104.225

0.866 5.20

25% Debt NPV Case - 1 NPV Case - 2 NPV Case - 3

50% Debt 1469.97 3116.52 2040.53 4003.79 2687.67 5010.91

75% Debt 9379.56 11471.49 13847.90

*Note: It is Assumed that Cost of Debt Remains Same.

C - 25% DEBT/VALUE RATIO IN PERPETUITY

3 2004E

4 2005E

5 2006E

3,900 585 (250) 335 (134) 201

5,600 840 (275) 565 (226) 339

7,500 1,125 (300) 825 (330) 495

300 0

300 0

300 0

151

314

495

5 Terminal Value (25% Debt)

5135.87

5 Terminal Value (50% Debt)

8464.98

5 Terminal Value (75% Debt)

21128.05

0.655 98.97

0.569 178.78

0.495 244.82

0.495 2540.15

0.495 4186.70

0.495 10449.74

0.728 109.99

0.655 205.80

0.590 291.91

0.590 3028.74

0.590 4992.00

0.590 12459.70

0.806 121.68

0.750 235.47

0.698 345.44

0.698 3584.10

0.698 5907.34

0.698 14744.34