Milano Pizza Club owns three identical restaurants popular for their specialty p
ID: 2482850 • Letter: M
Question
Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt–equity ratio of 35 percent and makes interest payments of $54,000 at the end of each year. The cost of the firm’s levered equity is 18 percent. Each store estimates that annual sales will be $1.56 million; annual cost of goods sold will be $800,000; and annual general and administrative costs will be $535,000. These cash flows are expected to remain the same forever. The corporate tax rate is 35 percent.
Use the flow to equity approach to determine the value of the company’s equity. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What is the total value of the company? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Use the flow to equity approach to determine the value of the company’s equity. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
b.What is the total value of the company? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
SALES = 1560000
(-) COST OF GOODS SOLD = 800000
(-) GENERAL AND ADMINISTRATIVE COSTS= 535000
EBIT = 225000
(-) INTEREST EXPENSE = 54000
EBT = 171000
(-) TAX EXPENSE = 59850
EAT = 111150 (PROFIT FOR EQUITY)
(a) VALUE FOR THE COMPANY'S EQUITY = PROFIT FOR EQUITY / KE(COST OF EQUITY)
=111150 / 18%
= $617500
(b) VALUE OF THE COMPANY = VALUE FOR THE COMPANY'S EQUITY / 65%
= 617500 / 65%
= $ 950000