Question
5B Coffee is a small, owner-operated coffee shop in Brookline, Massachusetts. At the end of the year, EBITDA excluding rent is expected to come in
5B Coffee is a small, owner-operated coffee shop in Brookline, Massachusetts. At the end of the year, EBITDA excluding rent is expected to come in at $275,000.
The company rents the space in which the store is set up. It pays $150,000 per year for rent. It owns the entire coffee-making equipment (the espresso machine and the coffee roaster). The book value of these assets is $450,000.
The remaining assets have a book value of $50,000. The firm takes an annual depreciation charge of $60,000 for the espresso machine and the coffee roaster and no charge for the remaining assets. Its capital expenditures come in at $62,000 per year.
The cost of equity stands at 16%. The firms debt is $300,000 on which it pays 8% interest, the current market rate for a company like 5B Coffee. Assume a tax rate of 25%.
i. Find the weighted average cost of capital for 5B Coffee.
ii. Assuming a steady-state growth rate of 3% for the free cash flow to the firm, value the equity.
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