Question

QUESTIONS 1. Give as many reasons as you can why Moore's initial estimate of the value of the restaurant was inappropriate. 2. Calculate the current liquidation value of the business assuming the assets can be sold at 75 percent of book and all debt is paid off at 100 percent of book. 3. Daugherty and Rogers believe that their valuation estimate should reflect competitive managerial wages. Do you agree that this adjustment to an EBT (earnings before taxes) estimate should be made? Why or why not? 4. Estimate the value of the restaurant in each of the three scenarios. 5. Using the business brokers' rule of thumb, estimate the value of the restaurant. 6. If Moore insists on dividing up the cash and marketable securities, what would happen to your estimates in question 4? (Assume the restaurant cur- rently has the optimal amount of these assets.) 7. How important are the liquidation value estimates in Exhibit 2 to the analy- sis? Explain.

I need help on the highlighted questiona.

For questions 2,4, & 5 I need help with the step by step process to the answers. Thanks!

what financial data do you need? i sent a photo of the assigment. The last photo is of a balance sheet and income statement

Answer 1

Ans-2
As it is mentioned and clear from the exhibit 1. Given at the end of the case:

Assumption 1. The cash amount will not be discounted to 75%, as it is money, not the asset whose resale value gets lesser.

After that all other assets are discounted to 75% of their book value.

The total value of asset= $ 46500 + ($28500 + $24000 + $186000)*0.75

                                 =$225375

In the case of liability side:

Assumption 2. As it is mentioned that firm has only two partners, the value of equity will not be taken with other liability, as it is owner’s share.
Now, rest of the items in liability side of business,

The total liability= $22500 + $34500 + $25500 + $88500=$171000

Now the total value of firm = value of asset- liability

                                       =$225375 -$171000

                                         =$54375

The current liquidation value, (which is equal; to the value one will get by selling the enterprise in today’s date), will be equal to current value of the firm, which is equal to $54375

Ans-4. As per given cases in exhibit2.

If we consider the EBT, we need to take care of tax which is 35%, as per given in the case,

Pessimistic Case:

The earning after paying tax will be $75000*(1-0.35) = $48750
Now as per the assumption, which is that, ( the cash flow will continue with same amount, as no increase in working capital is mentioned in case, and might be, the case has already taken care of these things)

This implies that the value of $48750 will continue to flow for 7 years.
Now for the simplicity of calculations, we are amortizing debt in one go at the end of 7 years. As the interest is already being paid, the principle will have to be paid.

Now in case of last year calculation, the total inflow will be equal to $48750 + $40,000 = $88750

Now the total debt to be paid = $88500

So, the total amount left after paying debt = $250

Now for the 6 years the regular flow of $48750 + $250(total inflow from 7th year), will contribute to net present value of restaurant.
Which will be equal to ($48750) ∑1/(1.2)^I, where i=1 to 6, + $250*1/(1.2) ^7 = $162212

In the same way:

For the moderate case, the value of enterprise will be = $226926.92

For optimistic case, the value of enterprise = $280759.5

Ans 5

As per the broker’s rule of thumb, the price of a restaurant is equal to the fair market value of its assets plus 20% goodwill factor minus the interest bearing debts

Case 1: When fair market value of assets is 75% of the book value:

Fair market value of assets is= 46500+ (28500+24000+186000) *.75=$225375

20% of goodwill factor= =$225375*0.20 =$45075

Interest bearing Debt (bonds) = $88500

Value of business= $225375+$45075-$88500 =$181950

Case 2: when fair market is equal to book value:

Fair market value of assets is= $285000
20% of goodwill factor=285000*.20=$57000

Interest bearing Debt (bonds) = $88500
Value of business =285000+57000-88500=$253500