Corporation Finance
(Course 35200)
Spring 2016
Professor Kelly Shue Assignment # 2 –Sampa Video Names: | Signatures: | Student # | Section: | Louise (Chiao-ling) Chang | | 458381 | 03 | Joonmo Lee | | 458378 | 03 | Sonja Schut | | 452395 | 03 | Alvin(Yaxin) Yu | | 456062 | 03 |

Honor Code: I pledge my honor that I have not violated the Honor Code in preparation of this case assignment.

1. What are the annual projected free cash flows? What is the NPV of the project assuming the firm was entirely equity financed? What discount rate is appropriate?
Since we assume that this project will be entirely equity financed, we can use ra. Assuming that this project has similar risk with that of Kramer.com & Cityretrieve.com, we can use their average beta to compute the discount rate based on CAPM model: ra=5.0%+1.5*7.2%=15.8%.
Given that FCF = EBIAT + DEP – INV, we thus have the FCF for the year 2001 to 2006 as follows: Year | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | FCF (‘000) | (1500) | (112) | 6 | 151 | 314 | 495 |
As from year 2007 onwards, the FCF growth rate is 5%, the continuation value as of 2006 is 495*(1+5%)/(15.8%-5%) = 4813, therefore, the total FCF for the year 2001 to 2006 is as follows: Year | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | Total FCF (‘000) | (1500) | (112) | 6 | 151 | 314 | 5308 |

Using NPV equation with ra = 15.8%, we therefore have NPV = $1,228,500

2. Value the project using the Adjusted Present Value (APV) approach, assuming the firm raises $750,000 of debt to fund the project and keeps the level of debt constant in perpetuity.
Given that the debt is $750,000, interest = rd * 750,000 = 6.8% * 750,000 = $51,000, therefore DTS = tc*interest = 40% * 51,000 = $20,400, PV(DTS) = DTS/ra= $129,100. Therefore, APV = NPV + PV(DTS) = 1,228,500+129,100 =