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Analysis of the famous Sampa Video Case

Number of Words : 2481

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This paper provides answers to the following questions on the case study – <br />1. Value the home delivery project assuming the project is entirely equity financed:<br /> What discount rate should be used to value the project?<br /> What are the annual projected free cash flows?<br /> What is the present value (PV) of the project?<br /> What is the net present value (NPV) of the project?<br /> Discuss management’s project cash flow projections for year 2002 – 2006 and the assumed 5 percent long-term growth rate thereafter.<br />2. Explain the Adjusted Present Value (APV) method. Use the APV method to value the home delivery project assuming the firm raises 50 percent of the up-front investment required to start the project by issuing debt to fund the project and keeps the level of debt constant in perpetuity. What discount rate(s) should be used to value the project? What are the relevant annual cash flows?<br />3. Explain the Weighted Average Cost of Capital (WACC) method. Use the WACC method to value the home delivery project assuming the firm maintains a constant 25 percent debt-to-value ratio in perpetuity for the project. What discount rate(s) should be used to value the project? What are the relevant annual cash flows?<br />4. What are the end-of-year debt balances for the home delivery project implied by the 25 percent target debt-to-value ratio?<br />5. Explain the Capital Cash Flow (CCF) method. Use the CCF method and the debt balances from question 4 to value the home delivery project. What discount rate(s) should be used to value the project? What are the relevant annual cash flows?<br />6. How do the values from the APV, WACC and CCF approach compare? How do the assumptions about financial policy differ across the three approaches?<br />7. Given the assumptions behind the APV, WACC and CCF method, when is one method more appropriate or easier to implement than the others?<br />8. Management was debating how to assess the project’s debt capacity and the impact of any financing decisions on value. The first option is to fund 50 percent of the up-front investment required to start the project by issuing debt to fund the project and keep the level of debt constant in perpetuity. The second option is to maintain a constant 25 percent debt-to-value<br />

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