15 Jun Question Chapter 7 – Questions There is a relationship between the
Question
Chapter 7 – Questions
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
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