5B Coffee is a small, owner-operated coffee shop in Brookline, Massachusetts. At the end of the year, EBITDA excluding rent is expected to come in at $275,000. The company rents the space in which the store is set up. It pays $150,000 per year for rent. It owns the entire coffee-making equipment (the espresso machine and the coffee roaster). The book value of these assets is $450,000. The remaining assets have a book value of $50,000. The firm takes an annual depreciation charge of $60,000 for the espresso machine and the coffee roaster and no charge for the remaining assets. Its capital expenditures come in at $62,000 per year. The cost of equity stands at 16%. The firm’s debt is $300,000 on which it pays 8% interest, the current market rate for a company like 5B Coffee. Assume a tax rate of 25%. i. Find the weighted average cost of capital for 5B Coffee. ii. Assuming a steady-state growth rate of 3% for the free cash flow to the firm, value the equity. PLEASE DO NOT GIVE SOLUTION IN IMAGE FORMAT

5B Coffee is a small, owner-operated coffee shop in Brookline, Massachusetts. At the end of the year, EBITDA excluding rent is expected to come in at $275,000. The company rents the space in which the store is set up. It pays $150,000 per year for rent. It owns the entire coffee-making equipment (the espresso machine and the coffee roaster). The book value of these assets is $450,000. The remaining assets have a book value of $50,000. The firm takes an annual depreciation charge of $60,000 for the espresso machine and the coffee roaster and no charge for the remaining assets. Its capital expenditures come in at $62,000 per year. The cost of equity stands at 16%. The firm’s debt is $300,000 on which it pays 8% interest, the current market rate for a company like 5B Coffee. Assume a tax rate of 25%. i. Find the weighted average cost of capital for 5B Coffee. ii. Assuming a steady-state growth rate of 3% for the free cash flow to the firm, value the equity. PLEASE DO NOT GIVE SOLUTION IN IMAGE FORMAT

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter3: Income Sources

Section: Chapter Questions

Problem 77P: During the last five months of the year, Dwana opens a new Internet telecommunications business...

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Question

5B Coffee is a small, owner-operated coffee shop in Brookline, Massachusetts. At the end of the year, EBITDA excluding rent is expected to come in at $275,000.

The company rents the space in which the store is set up. It pays $150,000 per year for rent. It owns the entire coffee-making equipment (the espresso machine and the coffee roaster). The book value of these assets is $450,000.

The remaining assets have a book value of $50,000. The firm takes an annual depreciation charge of $60,000 for the espresso machine and the coffee roaster and no charge for the remaining assets. Its capital expenditures come in at $62,000 per year.

The cost of equity stands at 16%. The firm’s debt is $300,000 on which it pays 8% interest, the current market rate for a company like 5B Coffee. Assume a tax rate of 25%.

i. Find the weighted average cost of capital for 5B Coffee.

ii. Assuming a steady-state growth rate of 3% for the free cash flow to the firm, value the equity.

PLEASE DO NOT GIVE SOLUTION IN IMAGE FORMAT

Definition Definition Cash that is left over after a company has paid for its operating and capital expenses. Unlike net income or earnings, free cash flow excludes non-cash expenses of the income statement and includes the expenditures on equipment and assets. Free cash flow also helps potential shareholders to evaluate how quickly the company can pay interest and dividends.

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