You have been asked to value Barrista Espresso, a chain of espresso coffee shops that have opened on the East Coast of the United States.
- The company had earnings before interest and taxes of $10.50 million in the most recent year on revenues of $50 million. HOwever, the founders of the company had never charged themselves a salary, which would have amounted to $1 million if based on comparable companies.
- The tax rate is 36% for all firms, and working capital is 10% of revenues.
- The capital expenditures in the most recent year amounted to $4.5 million, while depreciation was only $1 million.
- Earnings, revenues, and net capital expenditures are expected to grow 30% a year for five years, and 6% after that forever.
- The comparable firms have an average beta of 1.3567 and an average D/E ratio of 13.65%. The average correlation with the market is 0.50. Barrista Espresso is expected to maintain a debt ratio of 12% and face a cost of debt of 8.75%. The risk free rate is 6%, and the market risk premium is 5.5%.
A. Estimate the value of Barrista Espresso as a firm.
B. Estimate the value of equity in Barrista Espresso.
C. Would your valuation be differnt if you were valuing the firm for an IPO?