Question: The ABC Restaurant is a company with a unique concept: the buyer enjoys the Total Exclusive Wok Experience through films on the internet. The annual sales margin of ABCs restaurant will be 11,000, with yearly general and administrative costs being 6,000. Fixed assets are depreciated in 5 years. ABCs book asset value is 17,000 (50% refers to fixed assets). The book value of the senior debt, the junior debt and the equity are 2,000, 9,000 and 6,000 respectively. However, ABCs market asset value is 16,000, with the market value of the senior debt, the junior debt and the equity being 1,000, 4,000 and 11,000 respectively. The prevailing yearly market interest rate is 3.5% for the senior debt and 6.8% for the junior debt. The cost of equity is according to the books 14.5%, but the owners assume 14.1%. The corporate tax rate is 28%. The company plans to establish two other restaurants, with basically the same business model. Happily, synergy effects of 40% over the value of a single restaurant are expected. But when selling ABC with its three restaurants to an interested US buyer, the synergy effects may cancel out against a discount. If not selling out to the US firm, the cash dividend to shareholders will be raised.

Do the following calcualtion:

(1)Calculate the operating cash flow and net profit of ABCs current (single) restaurant.

(2)Calculate the current weighted average cost of capital (WACC) of ABC, both based on its books and its owners.

(3)Calculate the current value of ABC with both of the WACCs calculated in question (b). You may round off the WACCs to be applied.

(4)Calculate the current value of ABC at a price/earnings ratio of 6. What do you hold of the valuation methods applied in question (c) and (d)?