V2.ou are valuing a restaurant in Bergen with the following formation: - The restaurant had a pretax operating income of 100,000 in the most recent year. This income has grown5%a year for the past two years, and is expected to continue growing at that rate for the foreseeable future. - About40%of this operating income can be attributed to the fact that the owner is a master chef. He does not plan to stay on if the business is sold. - The restaurant is financed equally with debt and equity. The pretax cost of borrowing is6%. The beta for publicly traded firms in this industry is1.10, and the average debtto-equity ratio is similar to that of the restaurant. The treasury bond rate is5%, the market risk premium is5.5%and the tax rate is40%. - The capital maintenance expenditure, net of depreciation, was 10,000 in the most recent year and it is expected to grow at the same rate as operating income. - The restaurant is expected to have an operating life of 10 years, after which the building will be sold for 500,000 , net of capital gain taxes. a) Value the restaurant for sale. b) How much would the value change if the owner offered to stay on for the next three years? Exercise 5 (Fall 2019)You are valuing a restaurant in Bergen with the followinginformation:• The restaurant had a pretax operating income of 100,000in the most recent year. This income has grown 5% a yearfor the past two years, and is expected to continuegrowing at that rate for the foreseeable future.• About 40% of this operating income can be attributed tothe fact that the owner is a master chef. He does not planto stay on if the business is sold.• The restaurant is financed equally with debt and equity.The pretax cost of borrowing is 6%. The beta for publiclytraded firms in this industry is 1.10, and the average debt-to-equity ratio is similar to that of the restaurant. Thetreasury bond rate is 5%, the market risk premium is5.5% and the tax rate is 40%.• The capital maintenance expenditure, net of depreciation,was 10,000 in the most recent year and it is expected togrow at the same rate as operating income.• The restaurant is expected to have an operating life of 10years, after which the building will be sold for 500,000,net of capital gain taxes.a) Value the restaurant for sale.b) How much would the value change if the owner offeredto stay on for the next three years?

Quantum and timings of cash flows emanating from a restaurant are available. We have to value the…

Answered: ou are valuing a restaurant in Bergen…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 13PROB

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V2. ou are valuing a restaurant in Bergen with the following formation: - The restaurant had a pretax operating income of 100,000 in the most recent year. This income has grown5%a year for the past two years, and is expected to continue growing at that rate for the foreseeable future. - About40%of this operating income can be attributed to the fact that the owner is a master chef. He does not plan to stay on if the business is sold. - The restaurant is financed equally with debt and equity. The pretax cost of borrowing is6%. The beta for publicly traded firms in this industry is1.10, and the average debtto-equity ratio is similar to that of the restaurant. The treasury bond rate is5%, the market risk premium is5.5%and the tax rate is40%. - The capital maintenance expenditure, net of depreciation, was 10,000 in the most recent year and it is expected to grow at the same rate as operating income. - The restaurant is expected to have an operating life of 10 years, after which the building will be sold for 500,000 , net of capital gain taxes. a) Value the restaurant for sale. b) How much would the value change if the owner offered to stay on for the next three years?

Exercise 5 (Fall 2019)
You are valuing a restaurant in Bergen with the following
information:
• The restaurant had a pretax operating income of 100,000
in the most recent year. This income has grown 5% a year
for the past two years, and is expected to continue
growing at that rate for the foreseeable future.
• About 40% of this operating income can be attributed to
the fact that the owner is a master chef. He does not plan
to stay on if the business is sold.
• The restaurant is financed equally with debt and equity.
The pretax cost of borrowing is 6%. The beta for publicly
traded firms in this industry is 1.10, and the average debt-
to-equity ratio is similar to that of the restaurant. The
treasury bond rate is 5%, the market risk premium is
5.5% and the tax rate is 40%.
• The capital maintenance expenditure, net of depreciation,
was 10,000 in the most recent year and it is expected to
grow at the same rate as operating income.
• The restaurant is expected to have an operating life of 10
years, after which the building will be sold for 500,000,
net of capital gain taxes.
a) Value the restaurant for sale.
b) How much would the value change if the owner offered
to stay on for the next three years?

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

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