Sampa Video.ppt - Sampa Video Inc A small video chain is...

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Sampa Video, Inc. A small video chain is deciding whether to engage in a new line of delivery business and is conducting an economic analysis of the valuation impacts of this decision. This is a case basically regarding how to measure the benefits of financial leverage via different valuation approaches.
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Firm valuation (discount cash flow) and cost of capital When you use the after-tax cost of capital to be the discount rate, you basically take in the effect of the financing. If you discount the project cash flows (without financing) by the after-tax cost of capital, you will get the exact net present value as you use it to discount the total cash flows (project cash flows plus the financing cash flows). That is, when you use the after-tax cost of capital to discount financing related cash flows, the net present value would be zero.
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t=0 t=1 t=2 t=3 t=4 Initial invest. (total cost) (8,000,000) Inc. rev. 6,000,000 6,000,000 6,000,000 6,000,000 Inc. cost (2,000,000) (2,000,000) (2,000,000) (2,000,000) Deprec. 2,000,000 2,000,000 2,000,000 2,000,000 OP CF 3,500,000 3,500,000 3,500,000 3,500,000 NOP CF 3,000,000 Project CF (8,000,000) 3,500,000 3,500,000 3,500,000 6,500,000 Financing 8,000,000 Interest (AT) (360,000) (360,000) (360,000) (360,000) Repay. (8,000,000) Fin. Rel. CF 8,000,000 (360,000) (360,000) (360,000) (8,360,000) Total CF 0 3,140,000 3,140,000 3,140,000 (1,860,000)
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t=0 t=1 t=2 t=3 t=4 Project CF (8,000,000) 3,500,000 3,500,000 3,500,000 6,500,000 NPV (at 4.5%) 7,072,024 t=0 t=1 t=2 t=3 t=4 Total CF 0 3,140,000 3,140,000 3,140,000 (1,860,000) NPV (at 4.5%) 7,072,024 t=0 t=1 t=2 (t=3 t=4 Fin. Rel. CF 8,000,000 (360,000) (360,000) (360,000) (8,360,000) NPV (at 4.5%) 0 Assuming that financing totally comes from debt, and the before-tax cost of capital is 6%, tax rate 25%, so the after-tax cost of capital 4.5%.
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Valuation Methods Adjusted Present Value (APV) Approach WACC approach V L = CF L / WACC where WACC = K SU [1-tw d ] Capital cash flows approach V L = ( CF L +K D D) / K SU V EBIT t k tk D k V tD L su D D u ( ) 1
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Adjusted Present Value (APV) Approach APV = PV of asset flows + PV of side effects associated with the financing program.
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  • Spring '17
  • ALEKSANDRA GREGORIC

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