Problem 13-21 Comprehensive (LO4, 5, 6) Two ambitious business graduates, Boris and Isabelle, are considering purchasing Premier Pizza, a frozen pizza manufacturer. Forecasted annual sales for the coming year are $9.5 million, with operating costs equal to 65% of sales, depreciation is 3% of sales, and required annual investment in equipment is 3% of sales. Sales, costs, and investments are expected to grow 4% in perpetuity. On the basis of their analysis of the industry, Boris and Isabelle anticipate financing their company with 27% debt. The required rate of return on the debt will be 5% and the required rate of return on the equity will be 13%. Premier Pizza's corporate tax rate is 35%. The risk-free interest rate is 2% and the market risk premium is 9%. a. What is the maximum price Boris and Isabelle should be willing to pay for Premier Pizza? (Round your answer to 2 decimal places.) Маxіnun price | million b. A national grocery chain, Fresh Foods, is also considering making an offer for Premier Pizza. The levered equity beta of the grocery chain is 0.5, its cost of debt is 4%, it is 36% debt-financed, and it has a 35% tax rate. What is the maximum price that Fresh Foods should be willing to pay for Premier Pizza? Assume that Fresh Foods's forecast for Premier's cash flows is the same as Boris and Isabelle's. (Round your answer to 2 decimal places.) Кахіnun price million
Problem 13-21 Comprehensive (LO4, 5, 6) Two ambitious business graduates, Boris and Isabelle, are considering purchasing Premier Pizza, a frozen pizza manufacturer. Forecasted annual sales for the coming year are $9.5 million, with operating costs equal to 65% of sales, depreciation is 3% of sales, and required annual investment in equipment is 3% of sales. Sales, costs, and investments are expected to grow 4% in perpetuity. On the basis of their analysis of the industry, Boris and Isabelle anticipate financing their company with 27% debt. The required rate of return on the debt will be 5% and the required rate of return on the equity will be 13%. Premier Pizza's corporate tax rate is 35%. The risk-free interest rate is 2% and the market risk premium is 9%. a. What is the maximum price Boris and Isabelle should be willing to pay for Premier Pizza? (Round your answer to 2 decimal places.) Маxіnun price | million b. A national grocery chain, Fresh Foods, is also considering making an offer for Premier Pizza. The levered equity beta of the grocery chain is 0.5, its cost of debt is 4%, it is 36% debt-financed, and it has a 35% tax rate. What is the maximum price that Fresh Foods should be willing to pay for Premier Pizza? Assume that Fresh Foods's forecast for Premier's cash flows is the same as Boris and Isabelle's. (Round your answer to 2 decimal places.) Кахіnun price million
Chapter10: Project Cash Flows And Risk
Section: Chapter Questions
Problem 13PROB
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Transcribed Image Text:Problem 13-21 Comprehensive (LO4, 5, 6)
Two ambitious business graduates, Boris and Isabelle, are considering purchasing Premier Pizza, a frozen pizza manufacturer.
Forecasted annual sales for the coming year are $9.5 million, with operating costs equal to 65% of sales, depreciation is 3% of sales,
and required annual investment in equipment is 3% of sales. Sales, costs, and investments are expected to grow 4% in perpetuity. On
the basis of their analysis of the industry, Boris and Isabelle anticipate financing their company with 27% debt. The required rate of
return on the debt will be 5% and the required rate of return on the equity will be 13%. Premier Pizza's corporate tax rate is 35%. The
risk-free interest rate is 2% and the market risk premium is 9%.
a. What is the maximum price Boris and Isabelle should be willing to pay for Premier Pizza? (Round your answer to 2 decimal places.)
Maximum price
million
b. A national grocery chain, Fresh Foods, is also considering making an offer for Premier Pizza. The levered equity beta of the grocery
chain is 0.5, its cost of debt is 4%, it is 36% debt-financed, and it has a 35% tax rate. What is the maximum price that Fresh Foods
should be willing to pay for Premier Pizza? Assume that Fresh Foods's forecast for Premier's cash flows is the same as Boris and
Isabelle's. (Round your answer to 2 decimal places.)
Маxіmиn price
million
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