Pelican and Rotelli Restaurants (both rated two stars and are family owned) are putting up for sale. The asking price for Pelican Restaurant is $8.0 million while Rotelli is asking for $8.5 million. Assume that you are a financial analyst and was asked by your client, Mr. Robert J. Hayes to evaluate the two restaurants and to give a recommendation as to which one of the two restaurants to buy over. The true fact is that your client is already in the restaurant business and he is planning to acquire another one to expand his family business, Upon acquisition, your client is going to keep all existing employees that is, the restaurant will operate as usual except for the change in ownership. This is to assure the employees that their jobs are secured but they must work hard and be professional in their job. You took a visit to both the restaurants and talked to the present management and found the following facts: Pelican Rotelli Years of operation.. 15 35 Total number of full-time staff.......... 35 20 Average age of employees............ 28 35 Location outskirt downtown Parking area plenty town parking with fees Design of building contemporary conventional (classic colonial building) Patron. ...... mostly family working people & weekends tourists Business operation hours.............. 10 am - 11 p.m. 8 am - 9pm Mon-Sun Mon - Sun ** Note: Currently, both restaurants have internship program for the HOTEL, FOOD & CATERING major students from a local university. Over a year, an average of 20-30 interns may pass through both restaurants and the number varies from 3 to 5 interns per semester (6 months). Each intern works 40 hours week and paid an hourly rate of $8 besides the 3-hr course credit earned. Upon completion of their internship program, the restaurant manager would write a report to their professor on their performance. The comparative balance sheets and income statements for the past three (3) years from 2018 to 2019 were provided by the management of each restaurant and are attached with this case. However, they cannot provide the statement of cashflows because they never have one done before. The Pelican Restaurant Comparative Balance Sheet December 31, 2021, 2020 and 2019 Assets 2021 2020 2019 Current assets: Cash $112,000 $152,000 $115,000 Accounts receivable (net) 120.000 98,000 65,000 Inventories 201,000 192,600 169,600 Prepaid expenses 21,000 23,400 18,200 Total current assets $454,000 $466,000 $367,800 Fixed assets: Property, plant and equipment 1,850,000 1,550,000 1,470,000 Accumulated depreciation 810,000 746,000 680,000 Net property, plant and equipment 1,040,000 804,000 790,000 Total assets $1,494,000 $1,270,000 $1,157,800 Liabilities Current liabilities: Accounts payable $96,000 $80,000 $97,000 Current maturity of long-term debt 2,200 2,000 1,800 Accrued payroll 57,000 49,000 47,000 Income taxes payable 29,000 23,000 32.000 Other accrued expenses 13,800 6,800 12,000 Total current liabilities $198,000 $160,800 $189,800 Long-term liabilities: Long-term debt 43,000 45.000 47.000 Deferred income taxes 18,800 15,700 26,000 Total liabilities $259,800 $221,500 $262,800 Shareholders' Equity Common stock, $1 par $300,500 $300,500 $300,500 Retained earings 933,700 748,000 594,500 Total stockholders' equity $1,234,200 $1,048,500 $895,000 Total liabilities and stockholders' equity $1,494,000 $1,270,000 $1,157,800 Rotelli Restaurant Comparative Balance Sheet December 31, 2021, 2020 and 2019 Assets 2021 2020 2019 Current assets: Cash $90,000 $35,000 $80,000 Short-term investments 200,000 28.000 117000 Accounts receivable (net) 60.800 35.400 25,000 Inventories 104,000 95,000 75,000 Prepaid expenses 50,000 22,000 25,000 Total current assets $504,800 $215,400 $322,000 Fixed assets: Property, plant and equipment 2,750,000 1,900,000 1,650,000 Accumulated depreciation 325,000 200,000 100,000 Net property, plant and equipment 2,425,000 1,700,000 1,550,000 Intangible assets: Goodwill, net 62,500 75.000 87.500 Total assets $2,992,300 $1,990,400 $1,959,500 Liabilities Current liabilities: Accounts payable $127,000 $176,000 $140,000 Current maturity of long-term debt 69,000 63,000 58.000 Accrued payroll 50,000 38,000 39,000 Income taxes payable 12,000 8,000 5,000 Other accrued expenses 8,000 15,000 7,000 Total current liabilities $266,000 $300,000 $249,000 Long-term liabilities: Long-term debt 1,326,000 1,389,000 1,447,000 Total liabilities $1,592,000 $1,689,000 $1,696,000 Shareholders' Equity Common stock, $1 par $101,000 $1,000 $1,000 Additional paid-in capital in excess of par 1,250,000 400,000 400,000 Retained eamings 49.300 -99,600 -137,500 Total stockholders' equity $1,400,300 $301,400 $263,500 Total liabilities and stockholders' equity $2,992,300 $1,990,400 $1,959,500 Requirements: The Analysis Methods and Their Limitations Discussion/Body Business Valuation Analysis: i) Book value approach ii) Market value approach iii) Payback period approach iv) Net present value approach Vertical Analysis: Common size balance sheet Vertical Analysis: Common size income statement Horizontal Analysis Pelican and Rotelli Restaurants (both rated two stars and are family owned) are putting up for sale. The asking price for Pelican Restaurant is $8.0 million while Rotelli is asking for $8.5 million. Assume that you are a financial analyst and was asked by your client, Mr. Robert J. Hayes to evaluate the two restaurants and to give a recommendation as to which one of the two restaurants to buy over. The true fact is that your client is already in the restaurant business and he is planning to acquire another one to expand his family business, Upon acquisition, your client is going to keep all existing employees that is, the restaurant will operate as usual except for the change in ownership. This is to assure the employees that their jobs are secured but they must work hard and be professional in their job. You took a visit to both the restaurants and talked to the present management and found the following facts: Pelican Rotelli Years of operation.. 15 35 Total number of full-time staff.......... 35 20 Average age of employees............ 28 35 Location outskirt downtown Parking area plenty town parking with fees Design of building contemporary conventional (classic colonial building) Patron. ...... mostly family working people & weekends tourists Business operation hours.............. 10 am - 11 p.m. 8 am - 9pm Mon-Sun Mon - Sun ** Note: Currently, both restaurants have internship program for the HOTEL, FOOD & CATERING major students from a local university. Over a year, an average of 20-30 interns may pass through both restaurants and the number varies from 3 to 5 interns per semester (6 months). Each intern works 40 hours week and paid an hourly rate of $8 besides the 3-hr course credit earned. Upon completion of their internship program, the restaurant manager would write a report to their professor on their performance. The comparative balance sheets and income statements for the past three (3) years from 2018 to 2019 were provided by the management of each restaurant and are attached with this case. However, they cannot provide the statement of cashflows because they never have one done before. The Pelican Restaurant Comparative Balance Sheet December 31, 2021, 2020 and 2019 Assets 2021 2020 2019 Current assets: Cash $112,000 $152,000 $115,000 Accounts receivable (net) 120.000 98,000 65,000 Inventories 201,000 192,600 169,600 Prepaid expenses 21,000 23,400 18,200 Total current assets $454,000 $466,000 $367,800 Fixed assets: Property, plant and equipment 1,850,000 1,550,000 1,470,000 Accumulated depreciation 810,000 746,000 680,000 Net property, plant and equipment 1,040,000 804,000 790,000 Total assets $1,494,000 $1,270,000 $1,157,800 Liabilities Current liabilities: Accounts payable $96,000 $80,000 $97,000 Current maturity of long-term debt 2,200 2,000 1,800 Accrued payroll 57,000 49,000 47,000 Income taxes payable 29,000 23,000 32.000 Other accrued expenses 13,800 6,800 12,000 Total current liabilities $198,000 $160,800 $189,800 Long-term liabilities: Long-term debt 43,000 45.000 47.000 Deferred income taxes 18,800 15,700 26,000 Total liabilities $259,800 $221,500 $262,800 Shareholders' Equity Common stock, $1 par $300,500 $300,500 $300,500 Retained earings 933,700 748,000 594,500 Total stockholders' equity $1,234,200 $1,048,500 $895,000 Total liabilities and stockholders' equity $1,494,000 $1,270,000 $1,157,800 Rotelli Restaurant Comparative Balance Sheet December 31, 2021, 2020 and 2019 Assets 2021 2020 2019 Current assets: Cash $90,000 $35,000 $80,000 Short-term investments 200,000 28.000 117000 Accounts receivable (net) 60.800 35.400 25,000 Inventories 104,000 95,000 75,000 Prepaid expenses 50,000 22,000 25,000 Total current assets $504,800 $215,400 $322,000 Fixed assets: Property, plant and equipment 2,750,000 1,900,000 1,650,000 Accumulated depreciation 325,000 200,000 100,000 Net property, plant and equipment 2,425,000 1,700,000 1,550,000 Intangible assets: Goodwill, net 62,500 75.000 87.500 Total assets $2,992,300 $1,990,400 $1,959,500 Liabilities Current liabilities: Accounts payable $127,000 $176,000 $140,000 Current maturity of long-term debt 69,000 63,000 58.000 Accrued payroll 50,000 38,000 39,000 Income taxes payable 12,000 8,000 5,000 Other accrued expenses 8,000 15,000 7,000 Total current liabilities $266,000 $300,000 $249,000 Long-term liabilities: Long-term debt 1,326,000 1,389,000 1,447,000 Total liabilities $1,592,000 $1,689,000 $1,696,000 Shareholders' Equity Common stock, $1 par $101,000 $1,000 $1,000 Additional paid-in capital in excess of par 1,250,000 400,000 400,000 Retained eamings 49.300 -99,600 -137,500 Total stockholders' equity $1,400,300 $301,400 $263,500 Total liabilities and stockholders' equity $2,992,300 $1,990,400 $1,959,500 Requirements: The Analysis Methods and Their Limitations Discussion/Body Business Valuation Analysis: i) Book value approach ii) Market value approach iii) Payback period approach iv) Net present value approach Vertical Analysis: Common size balance sheet Vertical Analysis: Common size income statement Horizontal Analysis