sampa - FIN 553 Special Topics in Corporate Finance Sampa...

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FIN 553 Special Topics in Corporate Finance Sampa Video Case Study Fall 2010 Kellstadt Graduate School of Business DePaul University Dr. Keith M. Howe by Thatchanan Siddhijai
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Sampa Video Case Study 1. The NPV of the project entirely equity financed is $1,228. The appropriate discounted rate is 15.8%. 2. The APV of the project assuming the firm uses fixed debt of $750 thousand and keeps the level of debt constant in perpetuity is $1,528. 3. The NPV of the project using after-tax WACC and assuming a constant 25% target debt-to- value ratio in perpetuity is $1,470. Answer 1 – 3, please see attached spreadsheet for calculations. 4. 25% debt balances at year end imply interest tax shield. 5. The value of APV is higher than the value of WACC. Because APV method doesn't have to hold debt at a constant proportion of value. So, it can be assumed that the risk of the tax shields is the same as the risk of debt. And it can be discounted at 6.8% cost of debt which is lower than WACC 15.12%. In this case, Sampa expected the project would increase its annual revenue 5% perpetuity after the year
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This note was uploaded on 01/20/2011 for the course FIN 553 taught by Professor K during the Fall '10 term at DePaul.

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sampa - FIN 553 Special Topics in Corporate Finance Sampa...

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