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. You have collected the following information.
- The company had earnings before interest and taxes of $10.50 million in the most recent year. However, the founders of the company had never charged themselves a salary, which would have amounted to $1 million, if based upon comparable companies.
- The tax rate is 36%
- The capital expenditures in the most recent year amounted to $4.5 million, while depreciation was only $1 million.
- Working capital is expected to remain at 10% of revenues.
- Earnings, revenues and net capital expenditures are expected to grow 30% a year for 5 years, and 6% after that forever.
- There are three comparable companies, which are publicly traded.
|
Beta |
D/E |
kd |
|
|
Starbucks: |
1.74 |
9.53% |
9.00% |
|
Au Bon Pain: |
1.21 |
31.43% |
8.50% |
|
Sbarro: |
1.12 |
0.00% |
NA |
Barrista Espresso is expected to maintain a debt ratio of 12% and face a cost of debt of 8.75%.
a. Estimate the value of Barrista Espresso as a firm.
b. Estimate the value of equity in Barrista Espresso.
c. Would your valuation be any different if you were valuing the company for an initial public offering rather than a private valuation.