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Charles Black, a chef at a five-star restaurant in New York City, has decided to leave his job and start a new business, ma
produce, in a suburban town in New Jersey. He expects the business to grow with multiple outlets and exponential brand valu

Capacity investment: The business, Healthy Meals, will be run out of a storefront on Main Street, that will be converted into a
investment of $80,000. Licensing, legal and other set-up costs are expected to amount to $20,000. Bank loan of $5000, with
Mr. Black as chef) is capable of producing up to 60 family meals a day comfortably.
Unit Sales/ Revenues: The family meals, which will come pre-packaged and ready to serve up to 6 people, will be priced at $ 6
price expected to rise with the inflation rate in subsequent years (with inflation assumed to be 2% a year). The expectation is t
meals a day, on average, next year, but that sales will increase each year after that to hit a peak of 50 meals a day, in five year
in the beginning which will increase to hit a peak of 300 days a year in 5 years

Operating Costs: There are several fixed operating costs involved in running the restaurant – a rental expense of $25,000 for n
selling, general and administrative expenses that are expected to amount to $100,000 next year; these expenses will increase
year. The cost of the ingredients for he meals will amount to 30% of the revenues whereas labor costs (kitchen help, delivery p
revenues. The latter does not include a salary expenses of $80,000 next year, which would have grown with inflation over time
years.
Taxes: To compute the taxes, we use a marginal tax rate of 40% to cover federal, state and local taxes. Assume tax on losses c
Additional reinvestment: Since Mr. Black intends to invest in updating the kitchen appliances, renovating the storefront and w
We will assume that he will need to set aside 10% of his absolute after-tax operating income each year to cover these costs.
Average regression beta across public restaurants = 0.902
Average Debt to equity ratio for public restaurants= 25%
Riskfree rate is 4% and a market risk premium is 5%
The free cash flow to the firm in year 5 will continue to grow at the inflation rate for ten more years. At the end of year 15, we
The terminal value will be based on zero growth

You are required to do the following:-

Forecast the Profit/Loss for the next 5 years
Assess the start-up value on the basis of DCF approach
A prospective investor is interested in contributing 20% of the equity
The listed industry average EV/FCFF is 15. The investor wants to exit the firm through IPO and expects return of 30%
It is expected that the firm can go for IPO in its 10th year
What is the Pre money and post money value of the firm based on Venture capitalist approach
The investor is skeptical about the above presented forecasts and deems them to be an optimistic scenario
He assesses that in a realistic scenario the company will be able to start with sale of 15 meals a day at a price of $50 per meal
Also in a pessimistic scenario, the meals sold will be 10 per day priced at $40 per meal
Going by past data of success of restaurants, the investor predicts that the chances of realistic scenario is 50%, where as optim
Find the Value of firm for the investor after accounting for the uncertainty

Mr. Black and the investor held rounds of discussion for the funding
The investor has demanded a discount of 10% for lack of control
Mr. Black has also requested that the funds be locked in for atleast 5 years
The investor agreed to it after demanding discount of 5% for lack of marketability
Mr. Black has agreed to the terms and incorporated the discounts in the value after accounting for uncertainty
Post accounting for the discounts, should the investor go ahead with the investment
 Year 1 2 3 4 5
-7.5 units 20 27.5 35 42.5 50
-12.5 days 250 262.5 275 287.5 300
2% Price 60 61.2 62.424 63.67248 64.94593

Rev 300000 441787.5 600831 777998.1 974188.9

30% Ingredients 90000 132536.3 180249.3 233399.4 292256.7

20% Labour cos 60000 88357.5 120166.2 155599.6 194837.8
2% rent 25000 25500 26010 26530.2 27060.8
2% SGA exp 100000 102000 104040 106120.8 108243.2
2% salary 80000 81600 83232 84896.64 86594.57
Dep 8000 8000 8000 8000 8000

Total exp 363000 437993.8 521697.5 614546.7 716993.1

EBIT -63000 3793.75 79133.5 163451.4 257195.9

Int 350 350 350 350 350

EBT -63350 3443.75 78783.5 163101.4 256845.9

40% Tax -25340 1377.5 31513.4 65240.57 102738.4

PAT -38010 2066.25 47270.1 97860.85 154107.5

Eq 95000
Debt 5000 7%

Year 1 2 3 4
EBIT(1-t) -37800 2276.25 47480.1 98070.851
(+) Dep 8000 8000 8000 8000
(-) Capex 3780 227.625 4748.01 9807.0851
FCFF -33580 10048.625 50732.09 96263.765

PV ₹ -31,314 ₹ 8,738 ₹ 41,138 ₹ 72,791

Vf ₹ 1,856,861

Rf 4% Int rate 7%
Rp 5% tax rate 40%
Beta 1.25495652173913
Ke 10.27% Kd 0.042
We 0.5 Wd 0.5
WACC 7.24%

Unlever the beta Re-lever the beta

Beta - comparable co. 0.902 Beta - UL

D/E - comparable co. 0.25 D/E
of start up
Beta- UL = Beta / LF
Beta - L = Beta UL * LF
LF = 1+ (D/E * (1-t))
LF = 1+ (D/E * (1-t))
LF 1.15 LF

Beta - UL 0.784347826086957 Beta L

Year 1 2 3 4
FCFF -33580 10048.625 50732.09 96263.765

PVF 0.769230769230769 0.591715976331361 0.4551661 0.3501278

PV -25830.7692307692 5945.93195266272 23091.529 33704.62

PV 354,188.56 <- Post money val of firm

(-) Funds 19000

Vf 335,188.56 <- Pre money val of firm

Op Real Pess
360,003.94 191399.75 33675.232
Prob 0.05 0.5 0.45

Vf 128,853.92

Ve 123,853.92
Total Discount = 1-((1-DLOC)(1-DLOM))
0.145

V of VC 24,770.78

V post disocunt 21,179.02

 5 6 7 8 9 10 11 12 13
154317.5275
8000
15431.75275
146885.7748 149823.49 152820 155876.36 158993.89 162173.76 165417.24 168725.58 172100.1

₹ 103,573 ₹ 98,515 ₹ 93,704 ₹ 89,127 ₹ 84,774 ₹ 80,634 ₹ 76,696 ₹ 72,950 ₹ 69,387

Re-lever the beta

0.784347826

Beta - L = Beta UL * LF

LF = 1+ (D/E * (1-t))
1.6

1.254956522

5 6 7 8 9 10
146885.7748 149823.49 152820 155876.36 158993.89 162173.76 2432606

0.269329074 0.2071762 0.1593663 0.1225895 0.0942996 0.0725382

39560.60975 31039.863 24354.354 19108.801 14993.059 188220.56

<-- Using scenario manager
 14 15 TV

175542.1 179052.9398 2473998

₹ 65,998 ₹ 930,148