Sampa

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DUKE UNIVERSITY
Fuqua School of Business
FINANCE 251F/351
Individual Assignment #2
Sampa Video, Inc.
Prof. Simon Gervais Spring 2010 – Term 1
In this case, you have to assess the viability of the home-delivery project that Sampa Video is considering. You are asked to do your analysis using WACC, and then using APV. In both cases, you can use the data in Exhibit 2 to calculate the unlevered free cash flows of the project. Assume that these unlevered free cash flows will grow at 5% per year in perpetuity following the year 2006; that is, if you calculate the unlevered free cash flow to be UFCF2006 in 2006, the unlevered free cash flow will be UFCF2006(1.05)t−2006 in year t = 2007, 2008, . . .
When calculating the project’s value using WACC, assume that the target debt-to-value ratio of the project is 25%, and that the firm will borrow at a rate of 6.8%, as suggested in Exhibit 3.
When calculating the project’s value using APV, assume that Sampa Video will initially borrow
$1.5 million at a rate of 6.8% to start the project. However, assume that at the end of every year for the first five years, Sampa Video will repay $150,000 in principal (in addition to the interest on the outstanding loan) and reduce the value of the outstanding loan to $750,000 at the end of
2006. After that, assume that Sampa will keep the debt at that level (of $750,000 outstanding) in perpetuity. For your calculations with both WACC and APV, do your analysis with two different assump- tions for the project’s asset beta.
1. First do your analysis using the estimate of the project’s asset beta provided in Exhibit 3
( p
A = 1.50).
2. Then repeat your analysis using the return data on comparable firms contained in a separate spreadsheet that you can download from the course schedule at www.duke.edu/sgervais.
• This spreadsheet contains monthly return data from January 1996…...

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