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You are asked to value the Bear Bar
You are asked to value the Bear Bar. You have been doing research at the Bear Bar but you keep drinking too much and forgetting the details. You remember that the rent is something like $2,000 per week but could go up to $3,000 per week when the lease expires in two years. Utilities and insurance are approximately 500 per week. There is an extra worker 3 nights a week at $500 per night. You estimate that they sell 150 drinks per night (not including the free drinks to "Friends of the Bear Bar”. The average drink sells for $12 and they are open 5 nights a week. The cost of the drinks is approximately 30% of the revenue. The food they sell breaks even but brings in a lot more patrons.
Question 1 Can Andy and Grace pay themselves each $50,000 per year in the current conditions (weekly rent $2,000)? No, the business can't pay out $100,000 as the annual profit is $89,600 Yes, the business can pay out $100,000 as the annual profit is $89,600 Yes, the business can pay out $100,000 as the annual profit is $119,600 No, the business can't pay out $100,000 as the annual profit is $119,600
Question 2 Can Andy and Grace pay themselves each $50,000 per year once rent goes up 50% to $3,000? Yes, the business can pay out $100,000 as the annual profit is $67,600 Yes, the business can pay out $100,000 as the annual profit is $107,600 No, the business can't pay out $100,000 as the annual profit is $107,600 No, the business can't pay out $100,000 as the annual profit is $67,600
Question 3 In the current conditions (weekly rent $2,000), should Andy and Grace increase the average drink price to $14? With higher prices they will sell 20 less drinks per night. Yes, increasing prices will increase profit to $123,520 Yes, increasing prices will increase profit to $143,520 Yes, increasing prices will increase profit to $123,240 No, increasing prices will reduce profit to $103,520
Question 4 If the business runs for 5 years and weekly rent is $2,000 for the first 2 years and $3,000 thereafter, what is the PV of future cash flows assuming the cost of capital is 10%? $346,505 $519,600 $119,600 $306,505
Expert Solution
Sales (drinks) per night = 150
No.of weeks per year. = 52
Bear bar open per week = 5days
Total no. of days open per year =52*5 = 260 days
Sales (drink) yearly = 260*150 = 39,000
Selling price = $12
Total revenue = 39,000*12 = $468,000
Cost (30%) of revenue $468,000*30% = 140,400
Rent Per year = 2,000*52 = 104,000
Utilities and insurance cost per year = 500*52 =$26,000
Extra wages payment = 3*52*500 = $78,000
So, the net profits per year would be as follows
| Revenue | $468,000 |
| Less: Cost 30% | ($140,400) |
| Gross income | $327,600 |
| Utilities and insurance | ($26,000) |
| Rent expenses | ($104,000) |
| Additional wages | ($78,000) |
| Annual profit | $119,600 |
Hence , option (3) is the answer
(2)
Rent expenses = 3,000*52 = $156,000
Annual profits = 468,000 - 140,400 -26,000 - 78,000 - 156,000 = $67,600
Business, cannot pay $100,000 becaues the annual profits is $67,600
Option (4) is the answer
(3)...
sales drink per year = 130*52*5 = 33,800
Sales Revenue per yr = 33,800*14 = 473,200
Rent per year = 2,000*52 = $104,000
Calculation of annual profits
Profits = 473,200*70% - 104,000 - 26,000 - 78,000
= $123,240
Incresing in Price would results increase in profits to $123,240
Option (3) is the answer
(4).....
PV of C.F = Cash flows*(PVIF10%,n)
PV of cash flows =119600*1.7355 + 67,600*2.055 = $346,505
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