Milano Pizza Club owns three identical restaurants popular for their specialty p
ID: 2765203 • 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 $61,000 at the end of each year. The cost of the firm’s levered equity is 20 percent. Each store estimates that annual sales will be $1.7 million; annual cost of goods sold will be $870,000; and annual general and administrative costs will be $605,000. 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
a.$1,599,000
b$1,612,000
c$1,780,000
d $1,890,000
Explanation / Answer
Flow to Equity Each Restaurants Detais Amt $ Sales 1,700,000 Cost of goods sold 870,000 Genral & Admin Expense 605,000 Interest cost 61,000 EBT 164,000 Tax @35% 57,400 Net Income 106,600 Net Income from 3 restaurants 319,800 Net Cash flow to Equity = 319,800 Cost Of levered Equity = 20% Value of Equity=319800/20%= 1,599,000 So option a is correct.