Sampa video Inc. First we looked at the projected free cash ows. We established the cash ows by using the EI!"#depreciation$% EI!"#depreciation$%ap& ap&$investment $investment in 'W%. "he investment in 'W% is throughout the years ( so we could also leave them out of the e)uation. When using this formula the cash ows of Sampa videao inc. are for the investment year and the following years *((*$*((+ respectively $,-(( $,,* + ,-, /,0 /1- 2 thousand of dollars3. "he total value is 405,/ thousand2e6hibit 03. !fter !fter computing the cash ows we need the discount rate. ecause Sampa video inc. is entirely e)uity 7nanced we can calculate the discount rate by looking at the asset beta. "his is ,.- 2e6hibit /3. "o compute the appropriate appropriate discount rate we used the formula8 9isk free rate#:arket risk;asset eta 29f#:r;
-( thousand of debt to fund the project the ?resent value of the ta6 shield will be 4>-(;(0@/(( thousand. When we ad the calculation of the '?A in e6hibit 0 we get a total adjusted present value of /((#,**5.-@4,-*5- thousand. If we assume that the 7rm maintains a *-= Bebt$to$market value ratio our new return on e)uity 29e3 will be 18.05. 2calculation shown below3 Formula for return on e)uity8
ℜ= Ra + D ∗( Ra− Rd ) E
In this case8 ℜ=15.8 + 0.333∗(15.8 −6.8 ) → ℜ=18.80 = We calculate the W!%% with the ne6t formula8 Rwacc= Rwacc
ℜ∗ E Rd∗ D +( ∗( 1−t )) E + D E + D
C
Rwacc
=18.80 ∗0.75 +( 6.8∗0.25∗(1 −0.4 ))
=15.12 =
!fter !fter inserting this information in E6cel we got a '?A of $1469.97 2in thousands3
C
+. "he !?A method is a very transparent method because it makes a clear distinction between the assets and 7nancing decisions 2e.g. investments3 of a 7rm. "he !?A method is also a method that calculates the ?resent Aalue of ta6 shields by discounting them with a debt rate. So the !?A method is more appropriate to use in cases when a 7rm has a permanent debt so the 7rm can add the discounted ta6 shields to the value of the 7rm. "he !?A method is also a useful method when the 7rm has a constant changing debt$to$e)uity ratio because the capital structure of a 7rm is irrelevant for this method. Dn the other hand a 7rm can easily implement the W!%% method when there is constant value of the BE ratio because the W!%% method calculates the levered value of the 7rm by discounting the free cash ows from operations with the weighted average cost of capital. "he %%F method calculates the value of the 7rm by discounting the capital cash ows 2F%F# interest ta6 shield3 with the return on assets. "his means that it is appropriate to use the %%F or W!%% method when the debt is a 76ed part of the 7rms value. !t last if all the assumptions of the model are e)ual the choice of a model should be indiGerent because the value of a 7rm would practically be the same.
