Excess of capital spending over depreciation

Assignment Help Accounting Basics
Reference no: EM13925600

You have been asked by an investor to value a local restaurant. In the most recent year, the restaurant earned pretax operating income of $300,000. Income has grown an average of 4% annually during the last five years, and it is expected to continue growing at that rate into the foreseeable future. By introducing modern management methods, you believe the pretax operating-income growth rate can be increased to 6% beyond the second year and sustained at that rate through the foreseeable future. The investor is willing to pay a 10% premium to reflect the value of control. The beta and debt-to-equity ratio for publicly traded firms in the restaurant industry are 2 and 1.5, respectively. The business's target debt-to-equity ratio is 1, and its pretax cost of borrowing, based on its recent borrowing activities, is 7%. The business-specific risk for firms of this size is estimated to be 6%. The investor concludes that the specific risk of this business is less than other firms in this industry due to its sustained profit growth, low leverage, and high return on assets compared to similar restaurants in this geographic area. Moreover, per capita income in this region is expected to grow more rapidly than elsewhere in the country, adding to the growth prospects of the restaurant business. At an estimated 15%, the liquidity risk premium is believed to be relatively low due to the excellent reputation of the restaurant. Since the current chef and the staff are expected to remain if the business is sold, the quality of the restaurant is expected to be maintained. The ten-year Treasury bond rate is 5%, the equity risk premium is 5.5%, and the federal, state, and local tax rate is 40%. The annual change in working capital is $20,000, and capital spending for maintenance exceeded depreciation in the prior year by $15,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as operating income. What is the business worth?

Reference no: EM13925600

Questions Cloud

What is the expected excess return to sears : If the long-term expected excess return to the S&P 500 index is 7 percent per year, what is the expected excess return to Sears?
Popinski are two of the largest and most successful beverage : Super-Cola and Popinski are two of the largest and most successful beverage companies in the world in terms of the products that they sell and their receivables management practices
Effect of changes in real-world competitive environment : Management has recognized the effect of changes in the real-world competitive environment and government policies on other industries and anticipates similar events occurring in their industry, so they ask you for a report considering the followin..
Compare continuous and discontinuous change in this scenario : Compare and contrast continuous and discontinuous change in this scenario. Differentiate between the TWO TYPES of CHANGE AGENTS and how one or both can be used in this scenario.
Excess of capital spending over depreciation : The annual change in working capital is $20,000, and capital spending for maintenance exceeded depreciation in the prior year by $15,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same r..
How can the discrepancy be avoided : What profit would Good Ltd have made for the year ended 30 June 2019 if the revaluation of land had occurred on 29 April 2019, instead of on 30 June 2018?
Company cost of goods sold : Knox Manufacturing Company reported the following year-end information: beginning work in process inventory, $270,000; cost of goods manufactured, $1,074,000; beginning finished goods inventory, $380,000; ending work in process inventory, $330,000..
How your company applies compensation practice : Briefly describe the company you researched, its compensation strategy, best practices they are applying, and compensation-related challenges they are facing.
Explore traffic behavior when designing a network : Why is it important to explore traffic behavior when designing a network? What problems could arise if you do not understand traffic behavior when you build a new network or upgrade a network?

Reviews

Write a Review

 

Accounting Basics Questions & Answers

  Wood company has beginning work in process inventory of

wood company has beginning work in process inventory of 108000 and total manufacturing costs of 477000. if cost of

  Compute the gross margin ratio both with and without

use the following selected data from success systems income statement for the three months ended march 31 2014 and from

  Digital marketing-sales promotion-direct marketing

Write a 6,000- to 7,000-word paper that integrates your previous Learning Team assignments into a final Marketing Plan. In addition to your previous papers, include the following:

  Carryback provisions in the tax law

Applying the carryback provisions in the tax law, compute the net amount of taxes paid (amounts paid less refunds) for the ten-year period ending December 31, 2011

  Prepare a horizontal analysis of the comparative income

prepare a horizontal analysis of the comparative income statement of cpa tech inc. each amount listed must be in your

  The following direct materials and direct labor data

the following direct materials and direct labor data pertain to the operations of batista manufacturing company for the

  Jk software jks a public company with quarterly reporting

jk software jks a public company with quarterly reporting signed a contract with jr gardens on november 1 2009. the

  The payroll register of lowry landscaping co indicates

on september 1 klondike co. issued a 90-day note with a faceamount of 120.000 to arctic apparel co. for

  The firm uses the perpetual inventory system and there are

the following units of a particular item were available for sale during the yearbeginning inventory - 100 units at

  A process with 1600 units of beginning work in process

a process with 1600 units of beginning work in process completed and transferred out 20000 units during a period. there

  Balance sheet of donahue veterinary clinic

On August 31, the balance sheet of Donahue Veterinary Clinic showed Cash $9,000, Accounts Receivable $1,700, Supplies $600, Equipment $6,000, Accounts Payable $3,600, Common Stock $13,000, and Retained Earnings $700. During September, the followin..

  Determine the cost of one unit of cobra and asp assuming

assume that one of itws divisions has the following predicted indirect costs and cost drivers for 2013 for the given

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd