sgervais.
This spreadsheet contains monthly return data from January 1996 through December
2000 for two comparable rms, Flixbuster and Netblock, and for the S&P500 index
(which you can use as the market portfolio).
To estimate the equity beta of the comparable rms, you will need to run a regression
for each. As before, only the slope of each regression is useful for your analysis (i.e.,
there is no need to calculate/report on anything else).
For unlevering purposes, assume that
Flixbuster has a debt beta of 0.30 and a debt-to-equity ratio of 0.48,
Netblock has a debt beta of 0.35 and a debt-to-equity ratio of 0.65,
and that these rms debt is permanent (i.e., never rebalanced).
1
Use a straight average of the comparable rms asset betas to estimate the asset beta of
the project.
To make your analysis a bit easier, let us agree on the following general assumptions for the valuation
of the project.
Assume that the end of 2001 is time 0. Assume that the initial investment of $1.5 million in
the project is made at that time.
Use the risk-free rate provided in Exhibit 3, i.e., use r
f
= 5.0% throughout.
Use the market risk premium provided in Exhibit 3, i.e., use r
m
r
f
= 7.2% throughout.
When levering/unlevering betas, do not assume that debt betas are zero.
Assume that the 40% corporate tax rate provided in Exhibit 3 applies to Sampa and to both
comparable rms.
Assume that Sampa is otherwise very protable, i.e., assume that losses on the new project
will be used to shield its prots from other projects.
Do not pay attention to the two debt options mentioned in the cases last paragraph.
Ignore the data in Exhibit 1.
The rst page of your report should be an executive summary similar to that on the last page of
this handout. In fact, such a page is included in the spreadsheet that contains the comparable
rms data; feel free to use it. The rest of your report (1-2 pages of text, 1-2 pages of spreadsheet
exhibits) should include more details about your work. As usual, please make sure that this is
presented in legible fashion so that your report can be graded eciently and accurately.
2
Last name:
First name:
Section:
Sampa Video, Inc.: Executive Summary
1) WACC with
A
= 1.50
Project D/E = ???
E
= ???
r
E
= ???
WACC = ???
2001 2002 2003 2004 2005 2006
Initial Investment ???
Annual UFCF ??? ??? ??? ??? ???
Terminal Value ???
Total UFCF ??? ??? ??? ??? ??? ???
Project's NPV ???
2) APV with
A
= 1.50
r
A
= ???
NPV
U
2001 2002 2003 2004 2005 2006
Initial Investment ???
Annual UFCF ??? ??? ??? ??? ???
Terminal Value ???
Total UFCF ??? ??? ??? ??? ??? ???
Project's NPV
U ???
PV(Interest Tax Shields)
2001 2002 2003 2004 2005 2006
Annual Interest TS ??? ??? ??? ??? ???
Terminal Value of ITS ???
Total Interest TS ??? ??? ??? ??? ???
PV(debt tax shields) ???
APV = ???
3) Analysis Using Comparables
Flixbuster Netblock
E
= ??? ???
D
= ??? ???
D/E = ??? ???
A
= ??? ???
Comp's
A
=
???
4) WACC with Comparables 5) APV with Comparables
Project D/E = ??? r
A
= ???
E
= ??? NPV
U
= ???
r
E
= ??? PV(TS) = ???
WACC = ??? APV = ???
NPV = ???
FINANCE 351
Fall 2011 - Term 2
Individual Assignment #2