Reference no: EM131959651

You are considering purchasing a restaurant. The current income statement (2016) is presented below. Anticipating a drop off of sales after the change in ownership, your forecast for 2017 is that sales will drop 5%, and then recover in 2018 by increasing 10%, and increasing 15% in 2019. The gross profit margin will remain constant throughout the 3 years. Labor expenses are expected to increase 1% in 2017, increase 4% in 2018, and increase 5% in 2019. SG&A will increase 2%, 6% and 6% in each of the years. Depreciation will increase 10% in 2017, reflecting the new basis for the assets, then increase by 5% each year thereafter reflecting the new capex. Interest expense will remain constant, and the tax rate will remain constant. You estimate 3 years of free cash flows, then estimate a terminal value by taking the third year FCF and using a multiplier of 3. NWC will increase by $25,000 in 2017 and 2018, and $30,000 in 2019. CapEx of $50,000 per year is expected.

Income Statement for 2016:

Revenues             $3,000,000

     COGS           1,350,000

     Labor                400,000

     SG&A              150,000

     Depreciation      500,000

     EBIT              600,000

     Interest          100,000

     EBT            500,000

     Taxes                200,000

     EAT              300,000

Forecast the pro forma income statement for 2017, 2018 and 2019.

Perform a complete margin analysis on the restaurant’s pro forma income statement, and comment briefly on any trends.

Calculate the free cash flows for the restaurant, assuming no assumption of the debt.

Calculate the value of the business, assuming a 12% required rate of return.