Location: Coeur d’Alene, ID
The attached spreadsheet model is for the Wingstop restaurant located in Coeur d’Alene, ID, and currently listed for sale at $300,000. This model includes a pro forma income statement and balance sheet for the restaurant based on market assumptions in the area and an analysis of the costs of capital and internal rate of return forecasted for the restaurant. The model allows variables to be changed for all major inputs of the computations and includes citations for assumed values in the models.
In our model with the input values chosen, the restaurant would have a weighted average cost of capital equal to 1.23%. The internal rate of return would be equal to 45.7%. At the end of year ten, Wingstop is valued at $2.4 million. We realize that this number is extremely generous. For this reason, we have several items of concern within the class-instructed methodology of the balance sheet. First, we are taking on bank loans in later years when the company realistically would not need them. We only have loans to balance the balance sheet. An example includes taking out a $1.2 million loan in year ten when we clearly would not need that. Second, the retained earnings over a ten year period and the extra cash are extremely high because the numbers continue to compound on each other year after year giving us very unrealistic earnings.
In year ten, we show that the retained earnings were $1.8 million and the extra cash was $3.5 million. Once again, this causes our balance sheet to be highly inflated with a value that is unrealistic. Our forecast shows the value of the business at $3.7 million in year ten. If we adjust the balance sheet to appropriate levels, we feel the correct valuation of year ten should be $588,000 (reference the “realistic value” tab in our spreadsheet model for calculation). After changing these inputs, our numbers look more realistic.
The current WACC in the class method tab was at 8.69% in year one and in the realistic value our year one WACC changed to 10.2%. In year 10, our original WACC is at 6.71% and after the changes were made it is now at 6.46%. We feel more confident with these numbers.