Baker-Top Inc wanted to open up a few bakerys around Kauai. · Each bakery costs $145,000, but they think they can bring in $592,000 per year from each bakery. · They plan to purchase 2 at the beginning of year 1, 4 more at the end of year 2, and 3 more at the beginning of year 5 to spread out the work. · They plan to sell everything in 7 years and thinks they could sell them for $51,000 each at that time. · Assume a discount rate of 5%. · Depreciation is $41,000 per year per location. Year 1 # of bakerys 2 Step 1: forecast equity Operating Cash Flow Depreciation Net Income Cash flows from operations Cash flow from selling Capital expenditure Cash available to pay dividends Dividends Net change in cash beginning book value of equity Net Income Dividends Ending book value of equity Step 2: Forecast abnormal earnings Net Income Beginning book value of equity Cost of equity capital Normal earnings Abnormal earnings Step 3: Determine PV of abnormal earnings Abnormal earnings PV factor PV of abnormal earnings Sum of all years Beginning equity book value Value of business Step 3: Determine PV.
