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 afterlaying out the
money required to maintain or expand its asset
base.
It is important as itallows a company topursue
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.
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