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.

sales	$1,640,000
less:cost of goods sold	(840,000)
annual general and administrative costs	(575,000)
interest cost	(58,000)
EBT	167,000
less:taxes (167,000*35%)	(58,450)
Net income	108,550

value of equity = net income / cost of firms levered equity.....(since these payments occur forever)

=>108,550/0.20

=>$542,750.

b.value of company = value of equity + value of debt.

given , debt to equity ratio = 0.30

=> debt / 542,750 = 0.30

=> debt = 542,750*0.30

=>debt = 162,825.

now,

value of company = 542,750+162,825 =>$705,575.