Start small commercial bakery to supply gourmet deserts

Assignment Help Financial Management

Reference no: EM131317057

Sam wants to start a small commercial bakery to supply gourmet deserts to local restaurants. He believes that with his product line and his connections in the restaurant business, he can grow the business over the next five years into a profitable niche player in the pre-made food supply business. Sam projects the following cash flows (after any necessary reinvestment in the business):

Year 1 $250,000

Year 2 $500,000

Year 3 $750,000

Year 4 $1,000,000

Year 5 $1,250,000

Sam thinks the increase in profits will peak in about year six at $1.5 million, and that after that, they will grow at about 5% per year.

Sam is going to put up half the money and an investor associate is putting up the other half. This investor puts money into a lot of early stage companies, and he usually expects to make about 35% return.

Sam figures that once the business matures, he and the investor should only expect to make about 18% on the business, as that is similar to what some small publicly traded commercial bakeries make.

Using discounted cash flows (including the terminal value), what is the net present value of Sam’s business?

Reference no: EM131317057

Questions Cloud

The equivalent annual payment in constant dollars : You make 6 annual end-of-year payments of $12,000 each on a loan with a market rate of 6%. If annual inflation is 4%, what would be the equivalent annual payment in constant dollars? A logical first step might be to compute the present value of the 6..

How much will you pay for the company stock today : Staal Corporation will pay a $3.40 per share dividend next year. The company pledges to increase its dividend by 4.5 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stoc..

What is net present value of acquiring : The Floral Shoppe and Maggie's Flowers are all-equity firms. The Floral Shoppe has 1,600 shares outstanding at a market price of $20 a share. Maggie's Flowers has 2,550 shares outstanding at a price of $28 a share. Maggie's Flowers is acquiring The F..

Good return on equity or a poor return on equity : Based on all of the above information, will this company have a good return on equity or a poor return on equity?

Start small commercial bakery to supply gourmet deserts : Sam wants to start a small commercial bakery to supply gourmet deserts to local restaurants. He believes that with his product line and his connections in the restaurant business, he can grow the business over the next five years into a profitable ni..

What is its annualized percentage all-in-cost : Motoguzzie exports large –engine motorcycles (greater than 700 cc) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $3,000,000 of merchandise from Motoguzzie, with payment due in six months. If Motoguzzi..

Most important factors in creating business valuation : Often business owners are very disappointed when someone does a valuation of their business. The business owners will say things like "I haven't taken a paycheck in five years" and "I work seven days a week to keep this business running." what are t..

The remainder funded by common stock : Walker Corp. has a target capital structure of 27% long-term debt, 7% preferred stock, and the remainder funded by common stock. The yield on its 4% coupon bonds is 2.7%. The preferred stock is priced at $55 and pays $6.44 in dividends per share annu..

User Account

All Pages