Valuing a private business: You want to estimate the value of a privately owned restaurant that is financed entirely with equity. Its most recent income statement is as follows:



Cost of goods sold


Gross profit


Salaries and wages


Selling expenses


Operating profit (EBIT)

$ 900,000



Net income

$ 585,000

You note that the profitability of this restaurant is significantly lower than that of comparable restaurants, primarily due to high salary and wage expenses. Further investigation reveals that the annual salaries for the owner and his wife, the firm”s accountant, are $900,000 and $300,000, respectively. These salaries are much higher than the industry median salaries for these two positions of $100,000 and $50,000, respectively. Compensation for other employees ($200,000 in total) appears to be consistent with the market rates. The median P/E ratio of comparable restaurants with no debt is 10. What is the total value of this restaurant?