Problem 4: You work for an all-equity firm (i.e., one with no debt) that creates new concepts for fast casual restaurants (like Chipotle). You have been working on a new concept based on Cajun and Creole cooking traditions (as is best represented by the food of New Orleans). You have estimated that a single restaurant site will produce $300,000 in EBIT each year on average in perpetuity; the corporate tax rate for your firm is.20 (20%) since the new Tax reform bill passed. To open such a restaurant will cost, on average in cities across the United States, $2,000,000 per site. This question has you determine if such a concept produces a positive or a negative NPV for each site. The key part of the question is to determine the appropriate discount rate. The problem has you consider two different (but equally relevant) approaches, one based on CAPM and the other based on the returns from similar comparable restaurants that already exist. Based on CAPM: You believe that the return from the cash flows of your concept will have a beta of.5. Currently, financial analysts believe that the market risk premium (.e., E(RM) - Ri) will be E(RM) - Rp= .08 (8%) from now on. The current risk free-rate is .02 (2%). a. Based on CAPM, what should you use as the required rate of return for your concept? That is, given the beta of the cash flow return on your project, what does CAPM say the appropriate discount rate should be? b. Based on this CAPM discount rate, what is the Net Present Value (NPV) of a single restaurant? C. Based on this NPV, should you start building some restaurants? Yes or No? Explain your answer. 4 Based on comparable firms: You have discovered that Dale Co. is a fast casual restaurant chain that specializes in the cuisine of the Philippines (which, so far, is no more wide-spread than Cajun/Creole cuisine concept restaurants). The following information is publically available for Dale Co., which is a publicly traded firm. Debt: B = $100,000,000 Equity S = $300,000,000 Expected return on equity: Rs = 104 Expected return on debt: R3 = .02 The beta of Debt: 04 Corporate Tax Rate = 20 (20%) a. Using this data, what is the required rate of return on Dale Co.'s assets (this is, using MM Proposition II, calculate the required rate of return on the equity of the unlevered firm implied by the expected return on Dale Co.s' levered equity). Show your work below. b. Based on the required rate of return for Dale Co.'s assets (your answer above), what is your estimate of the NPV for a single site of your Cajun/Creole concept restaurant? NPV = c. Based on this compatible-firm analysis, should you start to build some restaurants? Yes or No? Explain