Sampa Video Case
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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.
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.
（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
3,140,000
3,140,000
3,140,000
(1,860,000)
（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
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%)