Question

8 value: 10.00 points Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 30 percent and makes interest payments of $55,000 at the end of each year. The cost of the firm's levered equity is 15 percent. Each store estimates that annual sales will be $1.58 milion; annual cost of goods sold will be $810,000; and annual general and administrative costs will be $545,000. These cash flows are expected to remain the same forever. The corporate tax rate is 34 percent. a. Use the flow to equity approach to determine the value of the company's equity. (Enter your answer ins 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.) Value of the company References eBook & Resources Section: 18.2 Flow to Equity Approach Difficulty: 1 Basic Worksheet Check my work

Answer 1

1 .q. q q. Solutions - Milano Pizza Chib owns three identical . Restaurants . Debt equity Ratio = 30% OR 0.30 gnterest Payment = $55000 cost of tim's levered equity = 15% OR 0.15 Annual sales of each stove = $1.58 Million =$ISODDDD - cost of groch cooldefeach stove a. $010,000 Annual general Administrative cost of each steze = $ 545,00CM » These cash flow are expected to remain game . forever. . Corporate tax Rate = 34% OR 0.34 Demand of Questions. (a): Calculation of the company's equity by using the equity approach. (A) Sales (As given) $ 1580,000 (B) cost of grocs sold (As geven) $ 810,000 (c) General de Administrati Asgiven) Gamit Administrative cost. $ 545,000 (D) Ë BITTA-(B+C)] . $ 225,000 (E) Interest Paymenitiven $ 55ºoo to

(F) EBT (D-E) (6) Tax @ 34% $170000 $ 57,800 . ($170000 x0,34) $112200 (H) Net Income (f-a) $112,200 - value of each stose of company's equity= 0.15 - (e. company has 3 store) Jo value of company's equity = (* 12.20043) sapun, oo value of company's equity = $2,240,000 total value of the company (b). Calculationd = 0,30 Debt equity 20.30. . Debt = $2,244,000 X0.30 $2,244,000 Debt= $.673,200. Total Company value = Debt tequiry :23

Total company value = $673,200+$2,244,000 Total company value = $2,917,200 Summary (a) value of the company's equity = $2,244,000 [(b) Total value of the company = $2,917,200 313