Question

Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt–equity ratio of 30 percent and makes interest payments of $58,000 at the end of each year. The cost of the firm’s levered equity is 20 percent. Each store estimates that annual sales will be $1.64 million; annual cost of goods sold will be $840,000; and annual general and administrative costs will be $575,000. These cash flows are expected to remain the same forever. The corporate tax rate is 35 percent. a. Use the flow to equity approach to determine the value of the company’s equity. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Value of the company’s equity $ b. What is the total value of the company? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Value of the company $

Answer 1

a.

Income Statement

Sales =1,640,000*3 = 4,920,000

COGS = 840,000*3 = 2,520,000

Gross profit =800,000 *3 = 2,400,000

Gen. Admin Cost = 575,000 *3 = 1,725,000

EBIT = 225,000 *3 = 675,000

Interest = 58000*3 = 174,000

EBT = 501,000

Taxes =0.35*501,000 = 175,350

Net Income = 325,650

Value of company's equity = Net Income/cost of equity = 325,650/0.2 = 1,628,250

Value of company's equity= $1,628,250

b.

Total Value = Debt + equity

Debt /Equity = 0.3

Debt/1,628,250 =0.3

Debt = 488,475

Value of company = 1,628,250 + 488,475 = 2,116,725

Value of the company =$2,116,725