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Question 1:
You want to estimate the value of a privately owned restaurant that is financed entirely with equity.
Its most recent income statement is as follows:
revenue $3 000 000
cost of sales 600 000
gross profit $2 400 000
sallary and wages 1 400 000
selling expenses 100 000
operating profit (EBIT) $ 900 000
Tax 315 000
profit $585 000
You note that the profitability of this restaurant is significantly lower than that of comparable restaurants, primarily due to high salary and wage expenses. Further investigation reveals that the annual salaries for the owner and his wife, the company's accountant, are $900 000 and $300 000, respectively. These salaries are much higher than the industry median salaries for these two positions of $100 000 and $50 000, respectively. Compensation for other employees ($200 000 in total) appears to be consistent with the market rates. The median P/E ratio of comparable restaurants with no debt is 10. What is the total value of this restaurant?
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