Pompeii 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 $43,000 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 $1.29 million; annual cost of goods sold will be $750,000; and annual general and administrative costs will be $410,000. These cash flows are expected to remain the same forever. The corporate tax rate is 21 percent.

Use the flow to equity approach to determine the value of the company's equity.

Question

Trace Floyd

Business

3 June, 03:04

Pompeii 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 $43,000 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 $1.29 million; annual cost of goods sold will be $750,000; and annual general and administrative costs will be $410,000. These cash flows are expected to remain the same forever. The corporate tax rate is 21 percent.

Use the flow to equity approach to determine the value of the company's equity.

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Halle · Answer 1

Value of equity = $429,562.5

Explanation:

The value of the company equity is the net cash flow discounted at levered cost o equity

Net cash flow = sales - cost of goods - admin cost - interest - taxes

= 1,290,000 - 750,000 - 410,000-43,000

= $87000

Net cash flow = 87,000 - (21% * 87,000)

=$68,730

PV of $68730 perpetuity discounted at 16%

PV = Net cash flow/cost of equity

68,730 / 0.16

PV = $429,562.5

Value of equity = $429,562.5

=