Weighted Average Cost of Capital and Discount Rate

Sampa Video, Inc You bewilder to prepare a manifestation to the management of the rigid. The presentation should have analysis of the date, your valuation of the investment and your investment recommendation. You have to be clear and brief and explain the main assumptions and methodologies used in the analysis. The theatrical role of the presentation will be considered in the grading. You have to hand in a handout of the presentation and an executive summary of no more(prenominal) than 2 pages. Guideline Questions for you Report 1. What is the esteem of the project assuming the hard was entirely integrity financed? What are the annual projected free funds flows?What discount rate is appropriate? NPV = $1,228,485 Discount rate = cost of equity (from CAPM) = 15. 8% (see model for projected free cash flows) 2. Value the project using the Adjusted Present Value (APV) approach assuming the firm raises $750 thousand of debt to fund the project and keeps the take aim of debt cons tant in perpetuity. NPV of Levered warm = $1,528,485 3. Value the project using the Weighted Average Cost of capital letter (WACC) approach assuming the firm maintains a constant 25% debt-to-market value ratio in perpetuity. NPV of Levered Firm = $1,469,972 4. How do the values from the APV and WACC approaches compare?How do the assumptions about financial policy differ across the two approaches? The level of debt with the fixed debt policy is fixed and thus the interest valuate shields have the same risk as the debt. The discount rate for interest tax shields with the fixed debt policy therefore is the debt rate of 6. 8%. With the 25% debt-to-value policy, the number of debt varies with the value of the firm so the expect interest tax shields besides vary with the value of the firm. These tax shields therefore should be discounted at the expected asset return 15. 8%, which is higher than the debt rate.