Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 18, Problem 3QP

a.

Summary Introduction

To Determine: The Value of Company’s Equity.

Introduction: A flow to equity (FTE) measure of profit that will be designated to investors by another organization other than the issuing organization, similar to a LLC.

b.

Summary Introduction

To Determine: The Total Value of Company.

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7. Jayden and Ziad own four identical pizza shops in downtown Newark. Each shop has a debt-to- equity ratio of 35 percent and makes interest payments of $52,000 at the end of each year. The cost of the firm's levered equity is 16 percent. Each store estimates that annual sales will be $1,450 million. The annual cost of goods sold will be $780,000. The owners estimated annual SG&A costs will be $450,000. Note also that these cash flows are expected to remain the same forever. Estimated corporate tax is 21 percent. A) Use the flow to equity approach to determine the value of the company's equity. B) Determine the total value of J&Z Pizza shops to date.
Milano Pizza Club owns a chain of three identical restaurants for their Milan style pizza.  Each store has $270,000 in debt outstanding and a debt-to-equity ratio of 30 percent.  The prevailing market interest rate is 9.5 percent.  An equivalent all-equity financed store would have a discount rate of 15 percent.  For each store, the estimated annual sales are $1,000,000, cash costs to generate these sales are $400,000 annually, depreciation charges are $300,000 annually, and capital expenditures are $300,000 annually.  Each of these values is assumed to continue in perpetuity with no growth.  The corporate tax rate is 40 percent.   Using the FTE approach, what is the value of Milano's Pizza Club?
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