Sampa Case

1-) What is the value of the project assuming the firm was entirely equity financed? What are the annual projected free cash flows? What discount rate is appropriate?

Remember value of  beta asset=beta equity *E/V+   beta debt  *D/V

FCF=EBIAT + DEPRECIATION – CAPITAL EXPENSE +INVESTMENT IN WORKING CAPITAL

2-)Value the project using the Adjusted Present Value approach assuming the firm raises 750000$ of debt to fund the project and keeps the level of debt constant in perpetuity.

3-) Value the project using the Weighted Average Cost of Capital(WACC) approach assuming the firm maintains a constant 25% debt to market value ratio in perpetuity.

4-) Compare the present value of all equity  firm  and present value of levered firms. Which one is bigger? Why? (Explain clearly)

5-) Why is the present value of the levered firm with 750000$ in debt forever is higher than the value of levered firm with 25% debt to value forever?

6-) In 2007, the present value of a company increased from 10 Billion dollar to 15 Billion dollar. The company debt was 4Billion dollar in 2006 and increased to 6 Billion in 2007. In 2008 the company Debt increased to 8Billion while the firm value increased to 20 Billion.

The majority of the investors are supporting the usage of pecking order theory in determining the firm capital structure. When CEO has been asked about the capital structure, he mentioned that he is exactly applying the pecking order theory of capital structure to maximize the firm value. Therefore he believes he will maximize the value this way and want every shareholder to feel better about the company.

I am a shareholder of this company. Should I believe in the CEO?

Notes:

Show all your calculations clearly.