Sampa Video, Inc.

Initial Cost $1.5 Million December 2001

Free Cash Flow Forecast
2002
Sales
1200000
EBITD (Rev. less exp.)
Less Depreciation
EBIT
Taxes 40%
EBIAT
Depreciation (add back)
Operating Cash Flow
Less CAP EX
Less Investment in (changes
in) NWC
Free Cash Flow

2003
2400000

2004
3900000

2006
7500000

585000
250000
335000
-134000
201000
250000
451000
-300000
0

2005
560000
0
840000
275000
565000
-226000
339000
275000
614000
-300000
0

180000
200000
-20000
8000
-12000
200000
188000
-300000
0

360000
225000
135000
-54000
81000
225000
306000
-300000
0

112,00
0.00

6,000.0
0

151,00
0.00

314,00
0.00

495,00
0.00

1125000
300000
825000
-330000
495000
300000
795000
-300000
0

1. a=1.5
Therefore, e=1.5 for an unlevered firm
Cost of Equity Ke= Rf+ e*( Rm- Rf)
=5%+1.5*7.2%
=15.8%
Terminal Value of at the end of 5 years = 519750/(.158-.05)
=4812500
Therefore value of the unlevered company=
-112000/1.158+6000/1.1582+151000/1.1583+314000/1.1584+
(495000+4812500)/1.1585
=2728485.08
2. If the project is financed with 0.73 mn debt to perpetuity then the D/V ratio =
0.73/1.5=0.4867
For D/V ratio of 48.67% the terminal value will be =519750/ (WACC-0.05)
Now,
Planned Debt to Value Ratio D/(E+D)=0.4867
Implied Debt to Equity Ratio D/E=0.95
Tax Rate=0.4

2007

519,75
0.00

Sampa Video, Inc.

Asset Beta=1.5
Unlevered cost of capital=0.158

Debt Beta=0.25
Cost of Debt capital=0.05+0.25*0.072
=0.068

Equity Beta e = a *(1+D/E*(1-t))- d*(D/E*(1-t))=2.21

Cost of (levered) Equity Capital
=0.05+2.21*0.072
=0.2092

WACC=0.1272
Terminal value at the end of 5 years in this case=519750/(.1272-.05)
= 6,803,010.47
Present value of the forecasted FCFFs
=-112000/1.1272+6000/1.12722+151000/1.12723+314000/1.12724+
495000/1.12725
= 477,230.72
Present value of the terminal value
=6,803,010.47/1.12725
= 3,697,141.30
Total value of the company in this case= 477,230.72+3,751,784.89
=4,174,372.02

3. For D/V ratio of 25% the terminal value will be =519750/ (WACC-0.05)
Now,
Planned Debt to Value Ratio D/(E+D)=0.25
Implied Debt to Equity Ratio D/E=0.333333333
Tax Rate=0.4
Asset Beta=1.5
Unlevered cost of capital=0.158

Debt Beta=0.25

Cost of Debt capital=0.05+0.25*0.072

=0.068
Cost of (levered) Equity Capital
=0.05+1.75*0.072

Sampa Video, Inc.

=0.176

Equity Beta e = a *(1+D/E*(1-t))- d*(D/E*(1-t))=1.75

Cost of (levered) Equity Capital
=0.05+1.75*0.072
=0.176

WACC=0.1422
Terminal value at the end of 5 years in this case=519750/(0.1422-.05)
=5637201.74
Present value of the forecasted FCFFs
=-112000/1.1422+6000/1.14222+151000/1.14223+314000/1.14224+
495000/1.14225
=446981.66
Present value of the terminal value
=5637201.74/1.14225
=2,899,698.19
Total value of the company in this case=446981.66+ 2,899,698.19
=3,346,679.85