1.You and three of your friends (all equal shares) start a chain of Mexican rest

Question

1.You and three of your friends (all equal shares) start a chain of Mexican restaurants (like Chipotle) that has presence only in the mountain states and in the western part of Canada. The firm is expected to register a sales of $12 million this year and you also estimate that the firm will be able to maintain a net profit margin of around 23%. A valuation expert informs you that while your firm is comparable to Chipotle (P/E 30.60) your presence is limited, your brand value is weaker, and your organization structure and manpower is relatively nascent. Therefore, your firm will suffer a 25% discount (hair-cut) in any fair valuation exercise. Find out the value of your investment in the firm.

Explanation / Answer

Given

Gross Sales=$12,000,0000

net profit margin %=23%

Net Profit Margin=$12,000,000*23%=$2,760,000

P/E=Price/Earnings=30.60

so

Eqrnings=E=$2,760,000

so fine P

P=Market value price of the firm=E*30.6=$2,760,000*30.6=$84,456,000

discount (hair-cut) in any fair valuation exercise %=25%

Discount (hair-cut) in any fair valuation exercise=$84,456,000*25%=$21,114,000

the value of total investment in the firm=Market value-Discount (hair-cut) in any fair valuation exercise

=$84,456,000-$21,114,000=$63,342,000

the value of your investment in the firm.=the value of total investment in the firm/3=$63,342,000/3=$2,114,000

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