FY 2000Sales 22,500

2,500Depreciation 1,100Operating Profit 1,400Net Income 660

Source: Casewriter estimates.

No. Of Stores 30Increase in Annual Growth Revenue 10% Over 5yrsFree Cash Flow Growth 5%Upfront Investment Required 1.5 million

Exhibit 1 Summary Financial Information on Sampa Video, Inc., 2000 (in thousands of dollars)

EBITDAa

aEBITDA is the Earnings Before Interest, Taxes, Depreciation and Amortization.

2002E 2003E 2004E 2005E 2006ESales 1,200 2,400 3,900 5,600 7,500

180 360 585 840 1,125Depreciation (200) (225) (250) (275) (300)

EBIT (20) 135 335 565 825Tax Expense 8 (54) (134) (226) (330)

(12) 81 201 339 495

300 300 300 300 300Investment in Working Capital 0 0 0 0 0

Source: Casewriter estimates.

Exhibit 2 Projections of Incremental Expected Sales and Cash Flows for Home Delivery Project 2002-2006 (in thousands of dollars).

EBITDa

EBIATa

CAPXb

aEBITD is the Earnings Before Interest, Taxes and Depreciation. EBIAT is the Earnings Before Interest and After Taxes. Taxes calculated assuming no interest expense.

bAnnual capital expenditures of $300,000 were in addition to the initial $1.5 million outlay, and are assumed to remain constant in perpetuity.

5.0%6.8%

Market Risk Premium 7.2%Marginal Corporate Tax Rate 40%

0.25Asset Beta for Kramer.com and Cityretrieve.com 1.50

Source: Casewriter estimates.

Exhibit 3 Additonal Assumptions.

Risk-free Rate (Rf)Project Cost of Debt (Rd)

Project Debt Beta (βd)

Value of the Project for Entirely Equity based FirmAsset Beta 1.5Cash Flow Growth rate 5%Risk Free Rate of Return 5%Market Risk Premium 7.20%Cost Of Equity 15.80%Initial Investment 1500Cost Of Debt 6.80%

0.25

Exhibit 2Years 0 1 2 3

2002E 2003E 2004EInitial Investment (1500)Sales 1,200 2,400 3,900

180 360 585Depreciation (200) (225) (250)

EBIT (20) 135 335Tax Expense 8 (54) (134)

(12) 81 201

300 300 3000 0 0

Free Cash Flow (112) 6 151 Discount Factor 1.00 0.86 0.75 0.64Present Value -1500 -96.72 4.47 97.24

14.49% DF @ 14.49% 0.873439 0.762895 0.666342PV -97.82514 4.577371 100.6177

3225.891725.89

Total Present Value 2728.49NPV 1228.49

Value of the Project 1228.49

Project Debt Beta (βd)

EBITDa

EBIATa

CAPXb

Investment in Working Capital

Value of the Project for Entirely Equity based Firm

Target D/E 0.33Target D/V 0.25New Equity Beta 1.80New Equity Return 17.94%

4 5 52005E 2006E Terminal Value

5,600 7,500840 1,125

(275) (300)565 825

(226) (330)339 495

300 3000 0

314 495 4812.50 0.56 0.48 0.48

174.62 237.72 2311.15

0.5820091 0.50834929213472 0.50834929213472182.750859 251.632899606685 2784.1364023922

ADJUSTED PRESENT VALUE (APV) APPROACH

Asset Beta 1.5Cash Flow Growth rate 5%Risk Free Rate of Return 5%Market Risk Premium 7.20%Cost Of Equity 15.80%Initial Investment 1500Cost of Debt 6.80%

0.25Additional Debt 750

Debt 750Cost of Debt 6.80%Interest Paid 51 20.4Tax 40%Tax Benefit 20.40 20.4Debt Tax Shield 300 300

Present Value of Firm 1528.49

Project Debt Beta (βd)

ADJUSTED PRESENT VALUE (APV) APPROACH

WACC - 25% DEBT/VALUE RATIO IN PERPETUITY

Growth rate 5% 5% 5%Tax Rate 40% 40% 40%Asset Beta 1.5 1.5 1.5Debt Beta 0.25 0.25 0.25Cost Of Debt* 6.80% 6.80% 6.80%

5% 5% 5%Risk Premium 7.20% 7.20% 7.20%Debt 25% 50% 75%Equity 75% 50% 25%Equity Beta 1.92 1.83 1.75Cost Of Equity 18.80% 18.20% 17.60%WACC 15.12% 11.14% 7.46%

Years 0 1 22002E 2003E

Initial Investment (1500)Sales 1,200 2,400

180 360Depreciation (200) (225)

EBIT (20) 135Tax Expense 8 (54)

(12) 81

300 3000 0

Free Cash Flow (112) 6

Discounting Factor WACC = 15.12%) 1.000 0.869 0.755Present Value -1500.00 -97.290 4.53

Discounting Factor WACC = 9.10%) 1.000 0.900 0.810Present Value -1500.00 -100.77 4.86

Discounting Factor (WACC = 4.40%) 1.000 0.931 0.866Present Value -1500.00 -104.2248 5.20

25% Debt 50% Debt 75% DebtNPV Case - 1 1469.97 3116.52 9379.56NPV Case - 2 2040.53 4003.79 11471.49NPV Case - 3 2687.67 5010.91 13847.90

*Note: It is Assumed that Cost of Debt Remains Same.

Risk Free Rate (Rf)

EBITDa

EBIATa

CAPXb

Investment in Working Capital

WACC - 25% DEBT/VALUE RATIO IN PERPETUITY

3 4 5 5 5 52004E 2005E 2006E

3,900 5,600 7,500585 840 1,125

(250) (275) (300)335 565 825

(134) (226) (330)201 339 495

300 300 3000 0 0

151 314 495 5135.87 8464.98 21128.05

0.655 0.569 0.495 0.495 0.495 0.49598.97 178.78 244.82 2540.15 4186.70 10449.74

0.728 0.655 0.590 0.590 0.590 0.590109.99 205.80 291.91 3028.74 4992.00 12459.70

0.806 0.750 0.698 0.698 0.698 0.698121.68 235.47 345.44 3584.10 5907.34 14744.34

Terminal Value (25% Debt)

Terminal Value (50% Debt)

Terminal Value (75% Debt)