HOS 470 Chapter 7 Homework 2015

There is a relationship between the WACC and market value of a business. Explain the relationship. + Present Value of FUTURE SELLING PRICE “List and explain the four elements in the above formula that affect the present value of an asset. ” Please list the three factors which determine the total interest rate: Chapter 7 – Application Exercises (Pg 216-217) 3a. Future value of a single $4,000 investment in 5 years Present value $4,000 Rate 10% Term 5 years Compounded Monthly Future value 3b. Future value of a single $4,000 investment in 5 years Present value $4,000 Rate 10% Term 5 years Compounded Semi-annually Future value 4. Future value of $100/month investment for 10 years Payment per month ($100) Rate 11% Term 10 years Compounded Monthly Future value 5. Single investment required for $8,000 future goal Future value $8,000 Rate 6% Term 4 years Compounded Monthly Present value 6. Future value of ten $500 annual investments Payment per year ($500) Rate 6% Term 10 years Compounded Annually Future value 7. Monthly investment required to reach goal Future value $10,000 Term 10 years Rate 8% Compounded Monthly Monthly investment size 8a. Dishwasher financing – No down payment Loan size $55,000 Term 5 years Rate 7% Compounded Monthly Monthly loan payment 8b. Dishwasher financing – 10% down payment Purchase price $55,000 Down payment 10% Loan size Term 5 years Rate 7% Compounded Monthly Monthly loan payment 9. Cost of a $1,500/month, 10 year annuity Annuity payment per month $1,500 Rate 6.5% Term 10 years Compounded Monthly Purchase cost Chapter 7: Whistling Winds Resort Spa (Pg 217) This spa has just opened. The owner has estimated sales, cost of sales, payroll, operating expenses for the first five years. Compute the Gross Profit and EBITDA for these five years: Year 1 Year 2 est Year 3 est Year 4 est Year 5 est Year 6 est Total Spa Revenue $32,00,000 $57,58,317 $65,03,677 $72,79,858 $80,86,863 Cost of Goods Sold 1,60,000 2,87,915 3,25,183 3,63,992 4,04,343 Gross Profit Payroll 23,04,000 32,78,150 35,59,542 39,01,888 42,56,566 Operating Expenses 8,96,000 11,11,380 11,97,812 12,97,296 14,04,492 EBITDA Captialized Value @ 10% of Year 5 EBITDA Now use a 10% discount factor and the Excel NPV function to compute the present value of the five years of EBITDA (Year 1 through Year 5) (i.e, cells C11 through G11): Net Present Value of Year 1 through Year 5 EBITDA @10%: Suppose that the EBITDA in Year 5 continues at that level in all subsequent years, forever. Treat this as a perpetuity to determine its capitalized value. What would the value of this endless stream of cash flow be worth, at a discount rate of 10%? Insert it in the cell above the arrow. Formula: Finally, recompute the NPV of the projected EBITDAs from Year 1 through Year 6, (i.e., including the capitalized value in Cell H11): Net Present Value of all future projected EBITDA @10%: Is this a reasonable estimate of the value of the spa? How does this value compare to the value you would obtain if you applied a normal (9X to 12X) EBITDA valuation approach to the Year 1 EBITDA? Chapter 7: New Fast Casual Restaurant (Pg 218) A new restaurant will cost $300,000. An investor will provide $75,000 equity for 30% of the net cash flow. The developer will obtain the balance of the capital needed through a $225,000 loan. Note that some of the answers have already been provided as a guide for you. Start by filling in the data on this set of projections for Year 1: Best Expected Worst Daily Sales $2,054.80 $1,643.84 $1,232.88 Annual sales (365 days) 365 $6,00,001.60 Cost of sales 32.6% $1,95,600.52 Variable expenses 37.0% $2,22,000.59 Fixed expenses $1,07,500.00 $1,07,500.00 Operating Profit (Loss) $74,900.49 Then project the Operating Profit (Cash Flow) for years 1 to 4 in each case, assuming that it will grow by 5% per year: Best Expected Worst Year 1 $74,900.46 Year 2 $78,645.48 Year 3 $82,577.76 Year 4 $86,706.65 A lender offers a $225,000 loan at 7% interest for 4 years (compounded annually.) Compute annual payment: ($66,426.33) Please fill in this amortization schedule using the tool on this website http://www.bretwhissel.net/cgi-bin/amortize Loan Amortization Table Annual Loan Payment Principal Payment Interest Payment Cumulative Principal Cumulative Interest Remaining Balance Year 1 $66,426.33 $50,676.33 $15,750.00 $50,676.33 $15,750.00 $1,74,323.67 Year 2 $66,426.33 $54,223.67 $12,202.66 $1,04,900.00 $27,952.66 $1,20,100.00 Year 3 Year 4 Total First, compute the Net Cash Flow and the cash available for the equity investor (30% share) and developer in the Best Case: Best Case Operating Profit (Cash Flow) Interest Payment Net Cash Flow Net Cash Flow for Investor Return on Equity for Investor Net Cash Flow for Developer Year 1 Year 2 Year 3 Year 4 Total Next, compute the Net Cash Flow and the cash available for the equity investor (30% share) and developer in the Expected Case: Expected Case Operating Profit (Cash Flow) Interest Payment Net Cash Flow Net Cash Flow for Investor Return on Equity for Investor Net Cash Flow for Developer Year 1 $74,900.46 $15,750.00 $59,150.46 $17,745.14 23.7% $41,405.32 Year 2 $78,645.48 $12,202.66 $66,442.82 $19,932.85 26.6% $46,509.98 Year 3 $82,577.76 $8,407.00 $74,170.76 $22,251.23 29.7% $51,919.53 Year 4 $86,706.65 $4,345.65 $82,361.00 $24,708.30 32.9% $57,652.70 Total $3,22,830.35 $40,705.31 $2,82,125.04 $84,637.51 $1,97,487.52 Third, compute the Net Cash Flow and the cash available for the equity investor (30% share) and developer in the Worst Case: Worst Case Operating Profit (Cash Flow) Interest Payment Net Cash Flow Net Cash Flow for Investor Return on Equity for Investor Net Cash Flow for Developer Year 1 Year 2 Year 3 Year 4 Total Last, compute the Present Values of the Net Cash Flow obtained by the Investor and Developer in Years 1 through 4, using a 10% discount rate: Net Preset Value @ 10% Best Case Expected Case Worst Case Investor $66,199.15 Developer $1,54,464.68

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