Milano Pizza Club owns three identical restaurants popular for their specialty p
ID: 2786094 • 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.
a. Use the flow to equity approach to determine the value of the company’s equity. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Value of the company’s equity $
b. What is the total value of the company? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Explanation / Answer
A)
Sales = 1.7 Million
CoGS = 870,000
Gross Profit = 830,000
SG&A Expenses = 605,000
Operating Profit = 225,000
Interest Expenses = 61,000
EBT = 164,000
Tax = 35%* 164,000= 57,400
Net Income = 106,600
PV(Flow to Equity) = 106,600/0.2 = 533,000
PV(Flow to Equity) = $ 533,000= Value of Company's Equity
b)
Total Value of Company = Value of Equity + Value of Debt
Value of Debt = 35% * Value of Equity (As D/E =35%)= $ 186,550
Total Value of company = 533,000+ 186,550 = $ 719,550