Question

Big Z Chicken is a private fast food business located in Georgia. The company sells franchises in the chicken business and charges a 7.00% royalty on all sales of its stores. Here is a quick summary of Big Z company financials:

Company Data Fiscal Year 2018 # of Stores 502.00

Revenues per store $1,000,000.00

Royalty on sales 7.00%

EBITDA Margin on Sales 15.00%

Balance Sheet Data Fiscal Year 2018

Interest bearing debt $15,000,000.00

Shareholder equity $12,000,000.00

Cash and Marketable Securities $4,000,000.00

We will compare Big Z against Chick-Today, a leader in the fast food business, that has an enterprise value of $410.00 billion and EBITDA of $104.00 billion.

Using the multiple for Chick Today, what is a rough estimate for the enterprise value of Big Z chicken?

Using Chick Today's multiple and Big Z financial data, what is the value of Big Z’s equity?

Answer 1

1. Calculation of EBITDA for Big Z Chicken :

2. Calculation of valuation multiple (enterprise value/ebitda) for Chick-Today :

Given : Enterprise Value = $410 billion

           EBITDA = $104 billion

Therefore,

Enterprise Value/EBITDA

= 410/104

=3.9423

3. Calculation of Enterprise Value for Big Z Chicken using valuation multiple of Chick-Today :

= EBITDA * 3.9423

= $52,71,000 * 3.9423

= $2,07,79,863.30 i.e., $20.88 million

4. Calculation of the value of Big Z Chicken's equity :

Enterprise Value = Market Value of Equity + Market Value of Debt - Cash

Therefore,

$2,07,79,863.30 = Market Value of Equity + $1,50,00,000 - $4,000,000

$2,07,79,863.30 - $1,50,00,000 + $4,000,000 = Market Value of Equity

It implies,

Market Value of Equity = $97,97,863.3 i.e., $9.8 million.