?You have been asked by an investor to value a restaurant.
Last year, the restaurant earned pretax operating income of
$350,000. Income has grown 5% annually during the last five years,
and it is expected to continue growing at that rate into the
foreseeable future. The annual change in working capital is
$30,000, and capital spending for maintenance exceeded depreciation
in the prior year by $20,000. Both working capital and the excess
of capital spending over depreciation are projected to grow at the
same rate as operating income. By introducing modern management
methods, you believe the pretax operating income growth rate can be
increased to 7% beyond the second year and sustained at that rate
into the foreseeable future.
?The ten-year Treasury bond rate is 6%, the equity risk
premium is 6.5%, and the marginal federal, state, and local tax
rate is 40%. The beta and debt-to-equity ratio for publicly traded
firms in the restaurant industry are 2.5 and 2.0, respectively. The
business's target debt-to-equity ratio is 1, and its pretax cost of
borrowing, based on its recent borrowing activities, is 8%. The
business-specific risk premium for firms of this size is estimated
to be 6.5%. The liquidity risk premium is believed to be 18%,
relatively low for firms of this type due to the excellent
reputation of the restaurant. Since the current chef and the staff
are expected to remain after the business is sold, the quality of
the restaurant is expected to be maintained. The investor is
willing to pay a 13% premium to reflect the value of control.
a. What is free cash flow to the firm in year 1?
b. What is free cash flow to the firm in year 2?
c. What is the firm’s cost of equity?
d. What is the firm’s after-tax cost of debt?
e. What is the firm’s target debt-to-total capital
ratio?
f. What is the weighted average cost of capital?
g. What is the business worth?
Please answer from a to g its one question related to each
other. Thanks