Reference no: EM132786053

Question - You have been asked by an investor to value a restaurant using discounted cash flow valuation. For the current year, the restaurant earned pretax operating income of $750,000. Income has grown 2% annually during the last five years, and is expected to continue growing at that rate for the next two years. Net operating working capital increased by $60,000 during the current year and current year capital spending on long-lived assets exceeded depreciation by $75,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as operating income. Subsequent to the second year, you believe the pre-tax operating income growth rate will increase to 3% per year and remain at that level into the foreseeable future.

The 10-year Treasury bond rate is 2.5%, the equity risk premium is 5.5%, and the marginal federal, state, and local tax rate is 35%. The restaurant's beta and its target debt-to-equity ratio are 1.74 and 0.67, respectively. Its pre-tax cost of borrowing, based on its recent borrowing activities, is 9%.

What is the restaurant's enterprise free cash flow in year 1?