Introduction: Sampa Video‚ Inc. was a local video rental store which maintained a large share of the movie rental market in Boston Massachusetts in the 90’s. The firm was looking to increase their base from those who visited the store to online ordering and delivery within the Boston area. They looked to increase their ability to grow by more than double the usual yearly growth rate for a five year span. By opening up the online and delivery service they hoped to increase their sales by 10% yearly
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Sampa Video‚ Inc. 1. What is the appropriate discount rate and the value of the project assuming the firm is going to fund it with all equity? “The discount rate of a project should be the expected return on a financial asset of comparable risk” To estimate Sampa Video’s cost of equity capital we used the CAPM model‚ in which rf refers to the risk free rate‚ to the market risk premium‚ and β to the company Beta (Table 1). Since the Beta of the company wasn’t known‚ we decided to use an
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Financing of 2728.49 Constant Debt Amount 750‚000 1‚228‚485 Value of Interest Tax Shield Value of Firm Scenario 3 Debt Financing of 300‚000 1‚528‚485 Constant Capital Structure 25% 1.92 18.80% 15.12% -112 @WACC 6 151 314 495 5135.87 Here‚ Beta of Equity would be Re WACC Free Cash Flows Terminal Value Total Cash Flow Present Value of FCF Present Value of TV Value of the Firm -112 -97.29 6 4.53 151 98.97 314 178.78 5630.87 244.82 2540.15 2969.97 End of Year Balances
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Sampa Video Valuation Case Study Free Cash Flow Projection: Based on all the given information and assumptions‚ the free cash flow projection for the company could be calculated as the table shown below (Exhibit 1‚ in thousands of $). The formula used for the calculation from year 2002 to 2006 is: FCF = (EBIT+Depr-Tax) + CAPX + Δ NWC. Starting at year 2007‚ the expected cash flow will be a growing perpetuity at an increasing rate of g=5%. Thus the terminal value could be calculated by the formula
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risk of the interest tax shield equals the risk of the debt. rTS=rD=6.8% PVTax Shield=204006.8%=$300‚000 APV=1228485+300000=$1‚528‚485 3. We has known that rU=15.8%‚ rD=6.8%‚DV=25%‚EV=75%‚ through the formula rU=rDDV+rEEV ‚ we can get: rE=18.8% WACC=rDDV1-Tc+rEEV=6.8%*25%*1-40%+18.8%*75%=15.12% The terminal value of project at the end of 2006: TV2006=FCF2007WACC-g=FCF2006*1.05WACC-g=5197500.1012=$5‚135‚870 Vproject=-1500000+-1120001.1512+60001.15122+1510001.15123+3140001.15124+4950001.15125+51358701
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9 Calculating WACC Mullineaux Corporation has a target capital structure of 60 percent common stock‚ 5 percent preferred stock‚ and a 35 percent debt. Its cost of equity is 12.5 percent‚ the cost of preferred stock is 5.5 percent‚ and the cost of debt is 7.2 percent. The relevant tax rate is 35 percent. a. What is Mullineaux’s WACC? b. The company president has approached you about Mullineax’s capital structure. He wants to know why the company doesn’t use more preferred stock financing
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at 4.5% * JP Morgan has issued an estimate for Expected Market Return at 8.5% * Euribor is 2% * Before tax cost of debt = 5% * Tax rate = 30% Please calculate the weighted average cost of capital (WACC) for this firm. 2. You are now asked to calculate the WACC for a toothpaste manufacturer with the following data: * Average share price for last 6 months = €34/ share * Current year’s dividend = €3/ share * Applicable growth rate = 3% * Tax rate =
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2. What is the maximum price they could expect to pay Monmouth‚ based on an analysis of valuation using discounted cash flow‚ calculation of WACC and terminal value determination? 2. Based on the DCF valuation and using a WACC of 8.25% (the beta assumed to be 1‚ the average beta of comparable firms and the coupon rate to be 7.96%‚ the rate for BB rated companies) and a growth rate of 5.5%. The fair price is $40.4 per share for Robertson‚ lower than the $50 offered by Simmons to sell their
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CAPITAL BUDGETING Cost of Capital Evaluating Cash Flows Payback‚ discounted payback NPV IRR‚ MIRR The Cost of Capital • Cost of Capital Components – Debt – Common Equity • WACC Should we focus on historical (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make decisions which involve raising and investing new capital. So‚ we should focus on marginal costs. What types of long-term capital do organizations use? nLong-term debt nEquity Weighted
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as the discount rate in net present value (NPV) project appraisal techniques.1 The weighted-average cost of capital (WACC) represents the overall cost of capital for a company‚ including the costs of equity and cost of debt‚ weighted according to the proportion of each source of finance within the business. In easy words WACC measures a company’s cost to borrow money. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Where: Re
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