Corporate valuation

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. • The company had earnings before interest and taxes of $10.50 million in the most recent year on revenues of $50 million. However, the founders of the company had never charged themselves a salary, which would have amounted to $1 million if based on comparable companies. • The tax rate is 36% for all firms, and working capital is 10% of revenues. • The capital expenditures in the most recent year amounted to $4.5 million, while depreciation was only $1 million. • Earnings, revenues, and net capital expenditures are expected to grow 30% a year for five years, and 6% after that forever. • The comparable firms have an average beta of 1.3567 and an average D/E ratio of 13.65%. The average correlation with the market is 0.50. Barrista Espresso is expected to maintain a debt ratio of 12% and face a cost of debt of 8.75%. The risk-free rate is 6%, and the market risk premium is 5.5%. 1. Estimate the value of Barrista Espresso as a firm. 2. Estimate the value of equity in Barrista Espresso. 3. Would your valuation be different if you were valuing the firm for an IPO? 4. List the pro and cons of using CAPM 5. List other methods to express cost of capital. 6. Describe the process of IPO