Case Analysis Sampa Video

For

By Abhishek Ojha ( ePGP- 04B - 003) Saurabh Kumar Singh ( ePGP 04B - 102 ) Toban Verghese ( ePGP 04B 116)

Introduction
Sampa Video, Inc. , second largest chain of video cassette rental stores in greater Boston is considering entering into the business of home delivery . Sampa Video will face competition from Netflix.com , Kramer.com and Cityretrieve.com. Company expects to grow its revenue from 5%-10% for the next 5 years and then 5% as a constant stable growth rate in the years to come. Management will incur a cost of $1.5 million in December 2001 and service will be launched in January 2002.

Problem
Financial viability of the project How much debt to be raised for the project ? a. Fund a fixed amount of debt , which would either be kept in perpetuity or paid down gradually. b. Adjust the amount of debt so as to maintain a constant value of debt to firm ratio.

Free Cash Flow

Free Cash Flow is a measure of financial performance calculated as operating cash flow minus capital expenditure. It also represents the represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. It is important as it allows a company to pursue opportunities that can enhance shareholders value. FCF = EBIT * ( 1 Tax Rate) + Depreciation and Amortization (if any) - Changes in Working capital Capital Expenditure.

Determining Rate of Asset

Ra = Rf + asset ( Rm Rf ) where : Ra = Rate of Asset Rf = Risk Free Rate Rm = Expected return on market Portfolio. Information Provided ( Refer Table on next slide) Ra = 5% + 1.5 * ( 7.2%) = 15.8%

Additional Assumption as per case

Discounted Free Cash Flow Estimation Period 2002 2006

Discounted Free Cash Flow Estimation Period 2007 onwards

Project is expected to grow at a constant rate of 5% after 5 years. So estimated free cash flow in 2007 = 495 * ( 1.05) = 519.75 Present Value of Perpetuity = CF/( r g ) So Value of Perpetuity in 2006 = 519.75 / ( 15.8% - 5%) = 4812.5 Discounted Value of Perpetuity in 2001 = 4812.5 / (1 + 0.083)^5 = 2311.149 Please Note : All numbers are in thousands of $

NPV of the Project

Conclusion & Working sheet.

Since the NPV of the project comes out to be $1228490 hence the project creates value for the firm in long run. Project should be undertaken by the firm.