Question

You work as a financial analyst and you will identify a potential investment. You will then use NPV, PP, PI, and IRR investment criteria to evaluate the opportunity. Finally, you will make a recommendation to the board of the directors of the company.

If you make any assumption in your analysis, please specify and explain it. You can Google “business for sale” to find the investment opportunities or find them in a local newspaper’s classified section.

You evaluation report will include business description, assumptions, data sources, analytical methods, and finally your conclusion of the business value.

Please submit only the word document, not the excel file. You may copy and paste the excel file or take a photo shot and include in the word file.

Special Occasion Restaurant & Bar

Asking Price: $2,100,000

Cash Flow: $271,000

Gross Revenue: $1,000,000

EBITDA: $171,000

FF&E: N/A

Inventory: N/A

Real Estate: $1,400,000

Established: 1990

Business Description

Fabulous Opportunity in a Great Location

This Restaurant & Bar was founded in 1990. For the past 28 years, the Chef/Owner has been feeding customers, body and soul, on the simple premise of providing homemade Italian food in a warm and comfortable atmosphere. Rooted in her rich Italian heritage, the Chef's reputation is second to none. She has been selected as one of the best female chefs in NJ by USA Today. Her pasta is homemade, and she uses fresh ingredients, many are grown in the Garden State. This great tradition can be passed on to her successor.

Detailed Information

Real Estate:

Owned

Included in asking price

Building SF:

3,000

Employees:

17

Facilities:

Restaurant & Bar on a standalone property with off-street parking. The building has an apartment on the second floor available for rent. There is a second building suitable for storage or an artist work space. The real estate includes the liquor license.

Competition:

This restaurant & bar is in an affluent area with daily visitors from Philadelphia and New York.

Growth & Expansion:

The restaurant is only open five nights a week, Tuesday thru Saturday. There is an opportunity to serve dinners two more nights per week and add Saturday and Sunday lunch/brunches.

Support & Training:

Owner will stay on to train the new owner and teach the recipes.

Reason for Selling:

Retirement

Answer 1

1.

	Time 0 cash flow
Land	(5,000,000)
Plant	(19,500,000)
Initial net WC	(825,000)
Total	(25,325,000)

2.

The bond is selling at 95% to par. Hence, this is the fair market value of the bond. MV= 95%*60,000= $57,000

3.

Market value of equity= selling price* no of shares outstanding. MV= 97*1,250,000= $121,250,000

4.

Market value of preferred shares= selling price* no of shares outstanding. MV= 95*90,000= $8,550,000

5.

Coupon rate	6.2%
Coupon payment	1,860.0
Time to maturity (years)	25
Payment frequency	Semi annual
Current MV	57,000
Par value	60,000
Semiannual yield	3.31%
Annual yield	6.61%
Tax rate	34%
Effective cost of debt	4.36%

6.

Expected rate of return on equity= cost of equity

Using CAPM,

R= Rf+ b*(Rm-Rf)

R= 3.8+ 1.15*(7-3.8)

R= 7.48%

7.Cost of preferred equity= dividend payment rate= 5.8% (since it is paid from after tax income)

Business description-

This Restaurant & Bar was founded in 1990. Restaurant & Bar on a standalone property with off-street parking. The building has an apartment on the second floor available for rent. There is a second building suitable for storage or an artist work space. The real estate includes the liquor license. This restaurant & bar is in an affluent area with daily visitors from Philadelphia and New York.

Growth & Expansion:

The restaurant is only open five nights a week, Tuesday thru Saturday. There is an opportunity to serve dinners two more nights per week and add Saturday and Sunday lunch/brunches.

Risks-

The restaurant’s USP is the teste of food which a proprietory skill of the current chef. While she is willing to provide the support and training to the new owners and chef, the skill may be lost in the transit. Also, the menu offered by the restaurant is very limited. Hence, it can run out of favor from the patrons quickly if the times change.

Profitability assessment-

We do not have a time horizon specified for the new owners. Hence we can consider that the restaurant will continue to operate for a long time in future without a definite life. The cost of debt/ capital is not specified. Hence we cannot find present value of the project. Assuming that the restanrant will not be sold in near future, the payback period at current stage is close to 8 years. If we include the growth and expansion plans, the revenue of the restaurant can increase by ~40%. This is huge growth opportunity. The supporting real estate can also be put to better use by the new owners. If we have to put a limited life on the project, the IRR comes out to be 5% over 10 years’ horizon. This is based on the current cash flow and appears to be low. If we include the growth projections, the IRR is much higher.

Overall, this looks like a good opportunity for investment.