An estimate should discount the future yearly after$-$tax cash flow a buyer can

expect to receive.

The restaurant's present working capital and equipment situation is adequate.

The amount of yearly depreciation will be about equal to the yearly principal

repayment on the debt.

No cash will be necessary to support any future increases in working capital.

Any growth in earnings before taxes $($EBT$)$ will be used to purchase or maintain

equipment.

NOTE: Assumptions $3,4,$ and $5$ imply that the after$-$tax cash flow a buyer will receive each

year equals the net income or earnings after taxes $($EAT$)$ estimate of each scenario.

The valuation estimate should consider a competitive wage and the renovation

cost$.$

The appropriate after$-$tax discount rate is $20$ percent.

$8.$ The relevant tax rate is $35$ percent.

Exhibit $2$ presents the assumptions that are specific to each scenario.

EXHIBIT $1$

Current Year Balance Sheet and Income Statement

EXHIBIT $2$

Assumptions Specific to Each ScenarioQUESTIONS

Give as many reasons as you can why $\text{'}$s initial estimate of the value of the

restaurant was inappropriate.

Williams and Klein believe that their valuation estimate should reflect

competitive managerial wages. Do you agree that this adjustment should be

made? Why or why not?

Estimate the value of the restaurant in each of the three scenarios in exhibit $2.$

Using the business brokers' rule of thumb, estimate the value of the restaurant.

Suppose Klein obtains information on three other restaurants that were sold in the

last year, and their market to book $($MV $/$ BV$)$ ratios were $1,0\mathrm{.}85,$ and $0\mathrm{.}75.$ How

would this information affect the negotiations?