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 $59,000 at the end of each year. The cost of the firm’s levered equity is 15 percent. Each store estimates that annual sales will be $1.66 million; annual cost of goods sold will be $850,000; and annual general and administrative costs will be $585,000. These cash flows are expected to remain the same forever. The corporate tax rate is 40 percent. Use the flow to equity approach to determine the value of the company’s equity.

Answer 1

Answer:

664,000 Company's equity

Explanation:

sales                   1,660,000

COGS                  (850,000)

G&A cost             (585,000)

EBIT                      225,000

Interest expense  (59, 000)

EBT                       166, 000

Income tax             (66,400)

Net income            99,600

We now calculate the present value of the equity based on the free cash flow:

$\frac{FCF}{k_e-growth} = Equity$

FCF 99,600

k_e 15%

grow = 0

99,600/0.15 = 664,000 Company's equity