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You have been asked by an investor to value a restaurant. Last year, the restaurant earned pretax operating income of $300,000. Operating income has grown
You have been asked by an investor to value a restaurant. Last year, the restaurant earned pretax operating income of $300,000. Operating income has grown 4% annually during the last five years, and it is expected to continue growing at that rate into the foreseeable future. The annual increase in working capital is $20,000, capital expenditures are $30,000, and depreciation expense is $15,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as pre-tax operating income. By introducing modern management methods, you believe the pre-tax operating income growth rate can be increased to 6% beyond the second year and sustained at that rate into the foreseeable future. The firms weighted average cost of capital is 12.22% and marginal tax rate is 30%. Since the current chef and the staff are expected to remain after the business is sold, the quality of the restaurant is expected to be maintained. What is free cash flow to the firm in year 1? What is free cash flow to the firm in year 2? What is the value of this business
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