Sampa Case Analysis
Case 1: Sampa Video Case
FBE 432 - J. K. Dietrich
January 29th, 2013
Meghan Ammon
Christina Daniele
Sarah Riley
To: Sampa Video Executive Committee
From: Team C Consultants– Meghan Ammon, Christina Daniele, Sarah Riley
Date: January 29, 2013
Subject: Sampa Video Home Delivery Expansion Analysis
Introduction
Sampa Video’s expansion into home delivery represents a tremendous business opportunity for the firm. However, before you make the initial investment this coming January, it is critical you consider the tax, risk, and revenue implications of the three proposed capital structures.
Financial Analysis – See appendix for detailed methodology and calculations | Capital Structure | Discount Rate | Net Present Value | Flow to Equity Approach | All Equity | R0 15.8% | $1,228,485 | Adjusted Present Value Approach | $750k Debt in Perpetuity | Rs 15.8% | $1,528,485 | Weighted Average Cost of Capital Approach | Debt/Market Value of .25 | RWACC 15.1% | $1,469,972 |
| 2002E | 2003E | 2004E | 2005E | 2006E | Free Cash Flows ($ Thousands) | (112) | 6 | 151 | 314 | 495 |
Conclusions and Recommendations
If Sampa Video chooses the all equity financing option, the firm will receive the lowest net profit from the project. The unlevered cost of equity is significantly higher than the cost of debt in this scenario. Furthermore, an entirely equity-based approach denies the firm the tax benefits of a more balanced capital structure. Additionally, the flow to equity approach is best used on a firm that has a highly levered, fixed capital structure, so is not the most appropriate model for this scenario.
The adjusted present value approach gives the highest net present value for the project due to the tax benefits of maintaining $750,000 of debt in perpetuity. However, this model assumes that Bdebt = 0. This assumption is inaccurate given that there is some systematic risk inherent in debt; combined with the additional risk of expanding
FBE 432 - J. K. Dietrich
January 29th, 2013
Meghan Ammon
Christina Daniele
Sarah Riley
To: Sampa Video Executive Committee
From: Team C Consultants– Meghan Ammon, Christina Daniele, Sarah Riley
Date: January 29, 2013
Subject: Sampa Video Home Delivery Expansion Analysis
Introduction
Sampa Video’s expansion into home delivery represents a tremendous business opportunity for the firm. However, before you make the initial investment this coming January, it is critical you consider the tax, risk, and revenue implications of the three proposed capital structures.
Financial Analysis – See appendix for detailed methodology and calculations | Capital Structure | Discount Rate | Net Present Value | Flow to Equity Approach | All Equity | R0 15.8% | $1,228,485 | Adjusted Present Value Approach | $750k Debt in Perpetuity | Rs 15.8% | $1,528,485 | Weighted Average Cost of Capital Approach | Debt/Market Value of .25 | RWACC 15.1% | $1,469,972 |
| 2002E | 2003E | 2004E | 2005E | 2006E | Free Cash Flows ($ Thousands) | (112) | 6 | 151 | 314 | 495 |
Conclusions and Recommendations
If Sampa Video chooses the all equity financing option, the firm will receive the lowest net profit from the project. The unlevered cost of equity is significantly higher than the cost of debt in this scenario. Furthermore, an entirely equity-based approach denies the firm the tax benefits of a more balanced capital structure. Additionally, the flow to equity approach is best used on a firm that has a highly levered, fixed capital structure, so is not the most appropriate model for this scenario.
The adjusted present value approach gives the highest net present value for the project due to the tax benefits of maintaining $750,000 of debt in perpetuity. However, this model assumes that Bdebt = 0. This assumption is inaccurate given that there is some systematic risk inherent in debt; combined with the additional risk of expanding