Sampa Video Questions
Valuing a Business Opportunity (Sampa Video)
The purpose of this case assignment is to understand valuation under the APV and WACC methodologies.
On the web page accompanying Sampa is a spreadsheet which shows estimates for the first five years associated with a project to deliver videos to homes in the area. Customers will reserve videos over the web, and the company will deliver them on the appropriate day for viewing. The company will then pick up the videos and return them to inventory after viewing. The initial up front investment for the project is $1.5 million, all incurred in 2001.
At the end of the five-year start up period, management estimates that the free cash flows associated with the project will continue to grow at a 5% rate. Estimates of interest rates, and asset betas associated with two comparable companies (Cityretrieve.com and Kramer.com) are also provided in the spreadsheet.
We will address the following questions.
1. What is the value of the project assuming it is all equity financed?
Management has been studying two financing options for the project.
2. Under the first, management would borrow $750 thousand of the upfront investment and keeps the dollar amount of debt constant in perpetuity. Value the project using the APV method.
3. The other alternative is to fund the project with a target capital structure of 25% debt to total capital in perpetuity. Value the project using the WACC method. What are the end of year debt balances implied by the 25% debt to total capital
The purpose of this case assignment is to understand valuation under the APV and WACC methodologies.
On the web page accompanying Sampa is a spreadsheet which shows estimates for the first five years associated with a project to deliver videos to homes in the area. Customers will reserve videos over the web, and the company will deliver them on the appropriate day for viewing. The company will then pick up the videos and return them to inventory after viewing. The initial up front investment for the project is $1.5 million, all incurred in 2001.
At the end of the five-year start up period, management estimates that the free cash flows associated with the project will continue to grow at a 5% rate. Estimates of interest rates, and asset betas associated with two comparable companies (Cityretrieve.com and Kramer.com) are also provided in the spreadsheet.
We will address the following questions.
1. What is the value of the project assuming it is all equity financed?
Management has been studying two financing options for the project.
2. Under the first, management would borrow $750 thousand of the upfront investment and keeps the dollar amount of debt constant in perpetuity. Value the project using the APV method.
3. The other alternative is to fund the project with a target capital structure of 25% debt to total capital in perpetuity. Value the project using the WACC method. What are the end of year debt balances implied by the 25% debt to total capital