Suppose that the McDonalds in California is for sale. Its balance sheet as of 12/31/24 lists: (i) the property (i.e., the land and building) is $700,000, the equipment and furniture are $100,000, its short-term assets (e.g., the inventory and supply) are $50,000, its short-term liabilities are $50,000 and it has no long-term liabilities. Its income statement for 2023 shows the latest annual net income is $100,000.

You estimate that the annual growth rate of net income will be 5% for perpetuity with a probability of 0.2, 3% with a probability of 0.7, and -2% with a probability of 0.1. The opportunity cost of your capital is 10% per annum.

Please answer the questions below (Please explain how you determine your answers. i.e., show your calculation).

(i) What must be the owners' equity according to the balance sheet?

(ii) What is the (economic) value of the owners' equity given the information above (i.e., What is the maximum you are willing to pay to buy McDonalds in California)?