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You have been asked by an investor to value a local restaurant. In the most recent year, the restaurant earned pre-tax operating income of $325,000. Operating Income has grown an average of 6 percent annually during the last 6 years, and it is expected to continue growing at that rate into the foreseeable future. By introducing modern management methods, you believe the pre-tax operating income growth rate can be increased to 7 percent beyond the second year and sustained at that rate through the foreseeable future. The investor is willing to pay a premium to reflect the value of control equal to 15 percent. The beta and debt-to-equity ratio for publicly traded firms in the restaurant industry are 1.8 and 1.5, respectively. The business’ target debt-to-equity ratio is 2.0 and its pre-tax cost of borrowing based on its recent borrowing activities is 8 percent. The business specific risk for firms of this size is estimated to be 5 percent. You conclude that the specific risk of this business is less than other firms in this industry due to its sustained profit growth, low leverage, and high return on assets compared to comparable restaurants in this geographic area. Moreover, per capita income in this region is expected to grow more rapidly than elsewhere in the country, adding to the growth prospects of the restaurant business. At an estimated 14 percent, the liquidity risk premium is believed to be relatively low due to the excellent reputation of the restaurant. Since the current chef and the staff are expected to remain if the business is sold, the quality of the restaurant is expected to be maintained. The 10-year Treasury bond rate is 6 percent, the equity risk premium is 5.5 percent, and the federal, state and local tax rate is 40 percent. The annual change in working capital is $20,000, capital spending for maintenance exceeded depreciation in the prior year by $14,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as operating income. What is the business worth? Make sure to show all your work.
You are managing a hedge fund. Today, you find that the stock of Microsoft is undervalued. So, you would want to buy Microsoft stocks. But you know that buying the stocks only will make you exposed to risk even if the stock is actually undervalued. H..
Study of Investment Analysis and Portfolio Management is a specialized area of study that is aimed at maximising return given a level of risk. The principles of Investment Analysis and Portfolio Management have broadly been applied by large corporate..
Revarop, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent for the next four years. It is then expected to grow at a constant rate of 6 percent. Revarop’s first dividend, of $3.75, will be paid in year 3. If the required..
Debt and equity financing of a venture requires a return to the providers. Describe the forms in which a provider of debt and the provider of equity receive their return. Which is more expensive for the firm? Which is more risky for the investor and ..
Determine the present value now of an investment of $3,000 made one year from now and an additional $3,000 made two years from now if the annual discount rate is 4 percent
Assume the total cost of a college education will be $375,000 when your child enters college in 17 years. You presently have $61,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college ed..
The most important determinant of an investment's portfolio risk is which of the following? If a bank pays quarterly compounding on its savings accounts, the ending amount after one year on a $1,000 deposit will be less than if the bank paid annual c..
Define the cash conversion cycle (CCC) and explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC.
Find problems inherent in Simpsons WACC calculation and what can you suggest to solve problems found - Simpson used the CAPM to estimate the cost of common stock.
Mikkelson Corporation's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free r..
What is the threshold B∗, i.e., the value of the private per-unit benefit above which the entrepreneur shirks?- what is the debt capacity?
Your client, Steven, age 43, has come to you for assistance with retirement planning. He provides you with the following facts. Using calculations, explain to Steven why it is realistic to use a wage replacement ratio of 80%. Using the purchasing pow..
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