Discount Rate Calculation
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Discount Rate Calculation
According to the case, the risk free rate is 5%; the market risk premium is 7.2%,
BA (asset beta) is 1.5; BD (debt beta) is 0.25;
(D/V)
= debt to total capital ratio =0.40
(E/V)
= equity to total capital ratio = 0.60;
(V/E)
Therefore:
= (V/E) BA – (D/E) BD = 2.5 – 0.167 =2.33
WACC = (E/V) rE + (D/V) rD (1-T)
Cash Flow and Terminal Value Calculation
In the case, management expects free cash flow to increase at 5% per year after 2006. This makes the estimated 2007 free cash flow value equal to FCF7=FCF6(1+g) =$519.75.
Free Cash Flow = EBIT (1 – tax rate) – (Capital Expenditures – Depreciation) – Change in Non-cash Working Capital
2002E
2003E
2004E
2005E
2006E
2007E
519.75
$5358.25
Discount Rate
14.70%
14.70%
14.70%
14.70%
14.70%
14.70%
PV (FCF/1+r)^t
-97.646
4.561
100.066
181.416
249.338
$2699.02
NPV Calculation (By calculator)
NPV = $1636.7532 IRR= 32.83%
Conclusion
I recommend Sampa Video to launch the home delivery project because the company is able to create $1636,753 dollars in value by undertaking this project.
Q#2.
Cost of Capital – No Debt
NPV- No Debt
2002E
2003E
2004E
2005E
2006E
2007E
519.75
$4812.5
Discount Rate
15.8%
15.8%
15.8%
15.8%
15.8%
15.8%
15.8%
PV (FCF/1+r)^t
($96.7)
$ 97.2
$ 174.6
$237.7
$2311.1
Terminal Value = CF7/ r-g= 519.75/ (0.158-0.05) =$4812.5
NPV estimation