Coffee Shop Chain Case A chain coffee shop company is considering adding a new l
ID: 2799292 • Letter: C
Question
Coffee Shop Chain Case A chain coffee shop company is considering adding a new line of business of offering small foods and snacks. The CEO of the company hired you as a financial analyst to help the company decide if it is economical to add foods and snacks to its business or not. You have spent some time gathering information and talking to people in the company and you collected following information. 1) The coffee shop chain already offers 3 types of drinks, each comes in 2 sizes. The coffee shop wants to add a breakfast sandwich and chicken nuggets. Current sales information of the existing drinks and estimated sales information for new foods according to the marketing consultant are sales 500,000 350,000 120,000 100,000 100,000 80,000 Unit Price Small Coffee Large Coffee Small Tea Large Tea Small Hot Chocolate Large Hot Chocolate Breakfast Sandwich Chicken Nuggets $%2.50 $3.50 $2.00 $2.70 $3.00 $3.70 $4.5050,000 (estimate) S5.0060,000 (estimate) 2) Marketing consultant thinks that the market for the existing drinks is mature and the unit sales will not grow anymore. However, he believes that the sales of the 2 new products will grow by 5% per year for the next 10 years. 3) The company plans to increase the prices (for both the existing and new products) at the inflation 4) Looking at the financial statements of the company you estimate that average production cost 5) To add the food business line, the company has to hire a food manager whose salary will be rate which is estimated to be 2% over the next 10 years (raw material, labor and ) is 40% of the revenue $90,000 for the first year plus %28 overhead costs (insurance, retirement, benefits, salary will increase by inflation rate over the next 10 years ). Her 6) The company pays $100,000 rent for its branches. The rent will increase by inflation rate every 7) The company paid $45,000 to its marketing consultant for providing all the marketing related 8) The company needs to buy new equipment for its branches to lunch the food business. The year information. You'll also charge the company $60,000 for your financial advice. equipment plus the installation costs would sum up to $1,000,000. The company uses MACRS depreciation and the salvage value of the equipment after 10 years is estimated to be $50,000 The company also has to invest 10% of its estimated first year production cost in working capital which will be recovered at the end of the 10-year period. 9) Page 1 of2Explanation / Answer
Calculation Of WACC Cost of Bond 920=(80*(1-(1+r)^-10)/r)+(1000/(1+r)^10) Before tax r= 9.26% After-tax r= 9.26%*(1-30%)= 6.48% Cost of preferred stock Annual dividend/Current market price 4/40= 10% Cost of equity Using CAPM, Ke=RFR+(Beta*Market risk premium) Ke=3%+(0.9*(12%-3%)) 11.1% WACC=(40%*11.1%)+(20%*10%)+(40%*6.48%)= 9.03% MACRS Rates 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 Year 0 1 2 3 4 5 6 7 8 9 10 Small Coffee 500000 500000 500000 500000 500000 500000 500000 500000 500000 500000 Unit price 2.5 2.55 2.601 2.65302 2.70608 2.7602 2.815406 2.871714 2.929148 2.98773 Sales revenue---1 1250000 1275000 1300500 1326510 1353040 1380101 1407703 1435857 1464574 1493866 Large coffee 350000 350000 350000 350000 350000 350000 350000 350000 350000 350000 3.5 3.57 3.6414 3.714228 3.78851 3.86428 3.941568 4.0204 4.100808 4.18282 Sales revenue---2 1225000 1249500 1274490 1299980 1325979 1352499 1379549 1407140 1435283 1463988 Small tea 120000 120000 120000 120000 120000 120000 120000 120000 120000 120000 2 2.04 2.0808 2.122416 2.16486 2.20816 2.252325 2.297371 2.343319 2.39019 Sales revenue---3 240000 244800 249696 254689.9 259784 264979 270279 275684.6 281198.3 286822 Large tea 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 2.7 2.754 2.80908 2.865262 2.92257 2.98102 3.040639 3.101451 3.16348 3.22675 Sales revenue---4 270000 275400 280908 286526.2 292257 298102 304063.9 310145.1 316348 322675 Small Hot chocolate 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000 3 3.06 3.1212 3.183624 3.2473 3.31224 3.378487 3.446057 3.514978 3.58528 Sales revenue---5 300000 306000 312120 318362.4 324730 331224 337848.7 344605.7 351497.8 358528 Large hot chocolate 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 3.7 3.774 3.84948 3.92647 4.005 4.0851 4.166801 4.250137 4.33514 4.42184 Sales revenue---6 296000 301920 307958.4 314117.6 320400 326808 333344.1 340011 346811.2 353747 Breakfast Sandwich 50000 52500 55125 57881.25 60775.3 63814.1 67004.78 70355.02 73872.77 77566.4 4.5 4.59 4.6818 4.775436 4.87094 4.96836 5.067731 5.169086 5.272467 5.37792 Sales revenue---7 225000 240975 258084.2 276408.2 296033 317052 339562.2 363671.1 389491.8 417146 Chicken Nuggets 60000 63000 66150 69457.5 72930.4 76576.9 80405.74 84426.03 88647.33 93079.7 5 5.1 5.202 5.30604 5.41216 5.5204 5.630812 5.743428 5.858297 5.97546 Sales revenue---8 300000 321300 344112.3 368544.3 394711 422735 452749.6 484894.8 519322.4 556194 8.a.Total sales revenues(1 to 8) 4106000 4214895 4327869 4445138 4566934 4693500 4825099 4962009 5104526 5252966 Less: Cash expenses: 9.Prodn.cost40%*Sales 1642400 1685958 1731148 1778055 1826773 1877400 1930040 1984804 2041811 2101187 10.Food mgr.salary(90000+28%*90000) 115200 117504 119854.1 122251.2 124696 127190 129733.9 132328.6 134975.2 137675 11. Rent 100000 102000 104040 106120.8 108243 110408 112616.2 114868.6 117165.9 119509 12. Mktg. & your salary(45000+60000) 105000 105000 105000 105000 105000 105000 105000 105000 105000 105000 13.MACRS depn. 142900 244900 174900 124900 89300 89200 89300 44600 0 0 14. Total costs(9to 13) 2105500 2255362 2234942 2236327 2254013 2309198 2366690 2381601 2398952 2463370 15.EBIT(8.a.-14) 2000500 1959533 2092927 2208811 2312921 2384302 2458410 2580408 2705575 2789596 16. Tax at 30%(15..*30%) 600150 587859.9 627878.2 662643.3 693876 715291 737522.9 774122.5 811672.4 836879 17. EAT ( 15-16) 1400350 1371673 1465049 1546168 1619045 1669011 1720887 1806286 1893902 1952717 18. Add Back depn. 142900 244900 174900 124900 89300 89200 89300 44600 19. Cash from operations 1543250 1616573 1639949 1671068 1708345 1758211 1810187 1850886 1893902 1952717 20.Cost of equipment -1000000 21. NWC introduced & Recovered -164240 164240 22. After-tax salvage 50000 23. Net annual cash flows -1164240 1543250 1616573 1639949 1671068 1708345 1758211 1810187 1850886 1893902 2166957 24. PV F at WACC 9.03% 1 0.91718 0.84122 0.77155 0.70765 0.64904 0.59528 0.54598 0.50076 0.45929 0.42125 25. PV at 9.03% -1164240 1415436 1359889 1265297 1182524 1108780 1046634 988328.4 926854.5 869848.2 912831 26. NPV at 9.03% 9912182 27.IRR 136%