1. Consulting Project
Fortune Pizza
B401
(Advanced Financial Management)
Jordan Rust
Cory Mortensen

2. Fortune Pizza – Portland, OR
The attached spreadsheet is for Fortune Pizza. It’s current listed price is for $58,000. The
restaurant is currently in a good location in the Southeast part of Portland, OR. The spreadsheet
includes a balance sheet and income statement that are based off of current comparable market
data, as well as geographical trends. Also included is an analysis of the cost of capital (WACC)
and the forecasted internal rate of return (IRR). The model also contains multiple variables that
can be better used to reflect the actual data for the company and currently contains assumed values.
Finally, there is a list of sources used to help with compilation of various data.
As the model currently stands, the company would have a weighted average cost of capital
equal to 5.41%, with an internal rate of return of 5.71%. With this in mind, we do believe the
company is undervalued. The IRR was forecasted with an initial investment of $235,272. These
numbers would change with numbers that more accurately portray the company.
The model also includes a reasonably forecasted mortgage table, which was used to help
ascertain the various debt/equity ratios that were needed to calculate the proper cash flows. Also,
there are two option tables that would be used if the company was looking to expand and whether
an option would be a viable route for the company to follow.

3. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Income Statement
Sales Revenue 159,781$ 164,601$ 169,567$ 174,682$ 179,951$ 185,377$ 190,984$ 196,758$ 202,705$ 208,829$
Cost of Good Sold 55,923$ 57,610$ 59,348$ 61,139$ 62,983$ 64,882$ 66,844$ 68,865$ 70,947$ 73,090$
Gross Profit 103,857$ 106,991$ 110,219$ 113,543$ 116,968$ 120,495$ 124,139$ 127,893$ 131,758$ 135,739$
Expenses
Salaries and Wages 60,606$ 63,882$ 73,710$ 78,624$ 81,900$ 86,814$ 91,728$ 96,642$ 101,556$ 106,470$
Advertising 7,989$ 8,477$ 8,995$ 9,544$ 10,127$ 10,745$ 11,402$ 12,099$ 12,839$ 13,624$
Building Insurance and Property Taxes 1,875$ 1,969$ 2,067$ 2,171$ 2,279$ 2,393$ 2,513$ 2,638$ 2,770$ 2,909$
Building Maintenance 850$ 893$ 937$ 984$ 1,033$ 1,085$ 1,139$ 1,196$ 1,256$ 1,319$
Depreciation Expense 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$
Total Expenses 76,667$ 80,567$ 91,056$ 96,669$ 100,686$ 106,384$ 112,129$ 117,922$ 123,768$ 129,668$
Income Before Interest and Taxes 27,191$ 26,424$ 19,163$ 16,874$ 16,282$ 14,111$ 12,011$ 9,970$ 7,990$ 6,071$
Mortgage Interest Expense 3,253$ 3,189$ 3,122$ 3,054$ 2,983$ 2,909$ 2,833$ 2,754$ 2,672$ 2,588$
Extra Bank Loan Interest Expense 4,758$ 3,196$ 2,305$ 1,286$ 166$ -$ -$ -$ -$ -$
Taxable Income 19,180$ 20,040$ 13,735$ 12,534$ 13,134$ 11,202$ 9,178$ 7,216$ 5,318$ 3,484$
Income Tax Expense 7,787$ 8,136$ 5,577$ 5,089$ 5,332$ 4,548$ 3,726$ 2,930$ 2,159$ 1,414$
Net Income 11,393$ 11,904$ 8,159$ 7,445$ 7,801$ 6,654$ 5,452$ 4,286$ 3,159$ 2,069$
BALANCE SHEET
ASSETS
Current Assets
Minimum Cash Balance 3,196$ 3,292$ 3,391$ 3,494$ 3,599$ 3,708$ 3,820$ 3,935$ 4,054$ 4,177$
Extra Cash -$ -$ -$ -$ 7,292$ 14,923$ 21,331$ 26,552$ 30,621$
Accounts Receivable 876$ 902$ 929$ 957$ 986$ 1,016$ 1,046$ 1,078$ 1,111$ 1,144$
Inventory 1,072$ 1,105$ 1,138$ 1,173$ 1,208$ 1,244$ 1,282$ 1,321$ 1,361$ 1,402$
Total Current Assets 5,144$ 5,299$ 5,459$ 5,623$ 5,793$ 13,260$ 21,071$ 27,665$ 33,077$ 37,344$
Land 50,000$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$
Equipment 42,700$ 42,700$ 42,700$ 42,700$ 42,700$ 42,700$ 42,700$ 42,700$ 42,700$ 42,700$
Less Accumulated Depreciation (Equipment) 2,847$ 5,693$ 8,540$ 11,387$ 14,233$ 17,080$ 19,927$ 22,773$ 25,620$ 28,467$
Buildings 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$
Less Accumulated Depreciation (Buildings) 2,500$ 5,000$ 7,500$ 10,000$ 12,500$ 15,000$ 17,500$ 20,000$ 22,500$ 25,000$
Goodwill 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$ 75,000$
Total Assets 242,497$ 237,305$ 232,119$ 226,937$ 221,760$ 223,880$ 226,344$ 227,592$ 227,657$ 226,577$
LIABILITIES
Current Liabilities
Accounts Payable (COGS Expense) 1,532$ 1,578$ 1,626$ 1,675$ 1,726$ 1,778$ 1,831$ 1,887$ 1,944$ 2,002$
Income Taxes Payable 7,787$ 8,136$ 5,577$ 5,089$ 5,332$ 4,548$ 3,726$ 2,930$ 2,159$ 1,414$
Total Current Liabilities 9,319$ 9,714$ 7,203$ 6,764$ 7,058$ 6,326$ 5,558$ 4,817$ 4,103$ 3,417$
Mortgage Loan 91,951$ 90,088$ 88,158$ 86,160$ 84,091$ 81,948$ 79,729.35$ 77,431.49$ 75,051.91$ 72,587.70$
Extra Bank Loan 47,585$ 31,957$ 23,053$ 12,863$ 1,659$ -$ -$ -$ -$ -$
Total Liabilities 148,855$ 131,760$ 118,414$ 105,787$ 92,808$ 88,274$ 85,287$ 82,248$ 79,155$ 76,005$
Common Stock 82,250$ 82,250$ 82,250$ 82,250$ 82,250$ 82,250$ 82,250$ 82,250$ 82,250$ 82,250$
Retained Earnings 11,393$ 23,296$ 31,455$ 38,900$ 46,702$ 53,356$ 58,808$ 63,094$ 66,253$ 68,323$
Total Liabilities and Shareholders Equity 242,497$ 237,305$ 232,119$ 226,937$ 221,760$ 223,880$ 226,344$ 227,592$ 227,658$ 226,577$
DFN -$ -$ -$ -$ -$ (0)$ 0$ (0)$ (0)$ 0$

4. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
ASSUMPTIONS
Popluation of Metropolitan Area 2,400,000 2,440,800 2,482,294 2,524,493 2,567,409 2,611,055 2,655,443 2,700,585 2,746,495 2,793,186 2% yearly change
Number of Pizza Places per 10,000 people 2.27 2.27 2.27 2.27 2.27 2.27 2.27 2.27 2.27 2.27 0% yearly change
Number of Pizza Places (Portland) 545.00 554.00 563.00 573.00 583.00 593.00 603.00 613.00 623.00 634.00
Number of Pizzas per year 10,329.00 10,432.00 10,536.00 10,641.00 10,747.00 10,854.00 10,963.00 11,073.00 11,184.00 11,296.00 1% Yearly Change
Average Cost of Pizza at Fortune Pizza (Sheet 3) 15.47$ 15.78$ 16.09$ 16.42$ 16.74$ 17.08$ 17.42$ 17.77$ 18.12$ 18.49$ 2% Yearly Change
COGS as percent of sales 35.00% 35% 35% 35% 35% 35% 35% 35% 35% 35% 0% yearly change
Advertising as percent of sales 5.00% 5% 5% 5% 6% 6% 6% 6% 6% 7% 3% yearly change
Average number of labor hours per year needed 6,552 6,552 6,552 6,552 6,552 6,552 6,552 6,552 6,552 6,552 0% yearly change
Average total cost per labor hour 9.25$ 9.75$ 11.25$ 12.00$ 12.50$ 13.25$ 14.00$ 14.75$ 15.50$ 16.25$
Average cost of insurance and property tax, % of building value 2.5% 2.6% 2.8% 2.9% 3.0% 3.2% 3.4% 3.5% 3.7% 3.9% 5% yearly change
Average maintenance cost per year, per square foot of buildings 0.85$ 0.89$ 0.94$ 0.98$ 1.03$ 1.08$ 1.14$ 1.20$ 1.26$ 1.32$ 5% yearly change
Cost per acre for land 250,000.00$
Acres of land 0.20
Cost per square foot for store building 75.00$
Square footage of building 1,000.00
Equipment included in sale 42,700.00$
Mortgage loan interest rate 3.5%
Mortgage loan length (in years) 30.00
Mortgage loan starting balance, % of total land and buildings 75.0%
Mortgage loan starting balance (PV) 93,750$
Extra bank loan interest rate 10.0% 10% 10% 10% 10% 10% 10% 10% 10% 10% 0% Yearly Change
Common stock starting balance, percent of total assets first year 10.0%
Days of inventory 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 0% yearly change
Days of accounts payable (COGS expense) 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 0% yearly change
Days of receivables (credit card use assumed for all revenue) 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 0% yearly change
Income tax rate (state plus federal) 40.60% 40.60% 40.60% 40.60% 40.60% 40.60% 40.60% 40.60% 40.60% 40.60% 0% yearly change
Depreciation Years (Building) 30 30 30 30 30 30 30 30 30 30 0% Yearly change
Depreciation years (Equipment) 15 15 15 15 15 15 15 15 15 15 0% yearly change
Minimum cash as % of sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 0% yearly change
Percentage of Book Value (Building) 125%
Percentage of Book Value (Equipment) 33%
Percentage of Book Value (Land) 125%
Price wanted by Sellers 75,000.00$

5. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
CASH FROM OPERATIONS
Operating Profit 32,537$ 31,771$ 24,510$ 22,221$ 21,629$ 19,458$ 17,357$ 15,317$ 13,337$ 11,418$
Less: Depreciation 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$ 5,347$
Taxable Operating Income 27,191$ 26,424$ 19,163$ 16,874$ 16,282$ 14,111$ 12,011$ 9,970$ 7,990$ 6,071$
Income Taxes 11,039$ 10,728$ 7,780$ 6,851$ 6,611$ 5,729$ 4,876$ 4,048$ 3,244$ 2,465$
Total Cash from Operation 21,498$ 21,043$ 16,729$ 15,370$ 15,018$ 13,729$ 12,481$ 11,269$ 10,093$ 8,953$
BALANCE SHEET
Accounts Receivable (876)$ (26)$ (27)$ (28)$ (29)$ (30)$ (31)$ (32)$ (33)$ (34)$ 1,144$ -$
Cash (3,196)$ (96)$ (99)$ (102)$ (105)$ (109)$ (112)$ (115)$ (119)$ (122)$ 4,177$ -$
Inventory (1,072)$ (32)$ (33)$ (34)$ (35)$ (36)$ (38)$ (39)$ (40)$ (41)$ 1,402$ -$
Accounts Payable 1,532$ 46$ 48$ 49$ 51$ 52$ 54$ 55$ 57$ 59$ (2,002)$ -$
Income Taxes Payable (From Operations Only) 11,039$ (311)$ (2,948)$ (929)$ (240)$ (881)$ (853)$ (828)$ (804)$ (779)$ (2,465)$ -$
Buildings (75,000)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ 75,000$ Book 50,000$
Adjustment on Sale 18,750$ Gain 43,750$
Tax on Sale (17,763)$
Equipment (42,700)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ 42,700$ Book 14,233$
Adjustment on Sale (28,467)$ Gain -$
Tax on Sale -$
Land (50,000)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ 50,000$ Book 50,000$
Adjustment on Sale 12,500$ Gain 12,500$
Tax on Sale (5,075)$
Goodwill (75,000)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ 75,000$
Total Free Cash Flows (235,272)$ 21,078$ 17,982$ 15,685$ 15,011$ 14,014$ 12,749$ 11,522$ 10,331$ 9,175$ 233,854$
IRR 5.711% WACC
WACC 5.408% Unlevered Beta 0.64
NPV 5,091.48$ Relevered Beta 0.92
S&P 8.00%
Tbills 1.83%
Averages Proportion Rate Tax Adj. Rate Weighted
82,720$ 37.1% 3.5% 2.1% 0.77%
11,712$ 5.3% 10.0% 5.9% 0.31%
82,250$ 57.6% 7.5% 7.5% 4.32%
46,158$
WACC 5.41%
222,839$

6. Black-Scholes
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Free Cash Flow from Forecast (235,272.08)$ 21,077.68$ 17,982.29$ 15,684.62$ 15,010.51$ 14,014.33$ 12,749.24$ 11,522.06$ 10,330.74$ 9,175.40$ 233,854.03$
IRR 5.71%
WACC from Forecast 5.41%
NPV of FCF 5,091.48$
T-Bill Rate used for WACC 1.83%
Relevered Beta used for WACC 0.92
Option to buy the company in 2 years
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Exercise Price (235,272.08)$
Cash Flows if Exercised -$ -$ -$ 21,077.68$ 17,982.29$ 15,684.62$ 15,010.51$ 14,014.33$ 12,749.24$ 11,522.06$ 10,330.74$ 9,175.40$ 233,854.03$
NPV $216,332.95
S X t STDEV(%) r Option Price
216,333$ 235,272 2 40% 1.83% 44,219$
The option being sold is: the option to buy this company two years from today, at a fixed price today of $235,272.08

7. Decision Tree
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Free Cash Flow from Forecast (235,272.08)$ 21,077.68$ 17,982.29$ 15,684.62$ 15,010.51$ 14,014.33$ 12,749.24$ 11,522.06$ 10,330.74$ 9,175.40$ 233,854.03$
IRR 5.71%
WACC from Forecast 5.41%
NPV of FCF 5,091.48$
T-Bill Rate used for WACC 1.83%
Relevered Beta used for WACC 0.92
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Success - Success
Normal Forecasted Operations (235,272)$ 21,078$ 17,982$ 15,685$ 15,011$ 14,014$ 12,749$ 11,522$ 10,331$ 9,175$ 233,854$
Puchase New Land and Building Location (200,000)$
Additional Revenues from New Location 10,000$ 13,000$ 15,000$ 17,000$ 18,000$ 18,000$
Sell New Location 250,000$
TOTAL (235,272)$ 21,078$ 17,982$ 15,685$ (184,989)$ 24,014$ 25,749$ 26,522$ 27,331$ 27,175$ 501,854$
NPV 51,252.63
Probability 54%
Success - Failure
Normal Forecasted Operations (235,272)$ 21,078$ 17,982$ 15,685$ 15,011$ 14,014$ 12,749$ 11,522$ 10,331$ 9,175$ 233,854$
Puchase New Land and Building Location (200,000)$
Additional Revenues from New Location 8,000$ 8,000$ 7,000$ 7,000$ 7,000$ 6,000$
Sell New Location 150,000$
TOTAL (235,272)$ 21,078$ 17,982$ 15,685$ (184,989)$ 22,014$ 20,749$ 18,522$ 17,331$ 16,175$ 389,854$
NPV (39,015.80)
Probability 36%
Failure
Adjusted Forecasted Operations (235,272)$ 15,808$ 13,487$ 11,763$ 9,006$
NPV (190,796.76)
Probability 10%
Total Expected NPV (5,449)$
60% Expansion is Good 54%
Good -Expand
90%
Decision Tree
40% Expansion is Bad 36%
10% 10%
Bad - Stop Co.
100%
This path was based off the thought that the
company was currently in a stable position and
the addition of another location would see
increased profits based off current customer
preferences. With that in mind, we felt that the
probability of this happening would be around
55%.
This path was based off the idea that after the
second purchase, the current clientele wouldn't
translate well to a second location and at the
point of sale, the company would have to sell for
a lower price.

8. Sources Prices
Pizza
Menu Data http://www.fortunepizza.com/pizza-menu.html 1 large pep 6.99$
Population/Growth Rate http://www.oregonmetro.gov/news/portland-region-nears-24-million-residents-growing-41000-last-year 1 large 3 top 13.99$
Pizza Facts http://www.theatlantic.com/health/archive/2014/02/new-report-americans-love-pizza/283721/ 1 med 2 top + breadsticks 14.49$
Pizzaria Statistics http://www.pmq.com/December-2014/Pizza-PowerThe-2015-Pizza-Power-Report/ 2 med 2 top 15.99$
State Income Tax Rate http://www.oregon4biz.com/Oregon-Business/Climate/Tax-Structure/ 1 large 5 top 16.99$
Comparable Property Data http://reporting.loopnet.com/report/c7557df7-76e3-4731-9531-394471d52308 1 large hwn + 1 large pep 16.99$
Land Data http://www.cityfeet.com/cont/or/portland-commercial-property# 2 large 2 top 19.99$
Mortgage Rate http://www.bankrate.com/oregon/mortgage-rates.aspx 1 top sm 5.25$
Equipment Data/Sale Listing http://bit.ly/2cWTs0u 1 top med 10.00$
T-Bill Rates https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield 1 top lg 11.00$
Beta Information http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/totalbeta.html 1 top xxl 16.00$
Volatility Information http://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1507&context=refereed med combo 12.99$
lg combo 15.99$
xxl combo 20.99$
med veg 12.99$
lg veg 14.99$
xxl veg 19.99$
med meat 12.99$
lg meat 15.99$
xxl meat 20.99$
med garlic 12.99$
lg garlic 15.99$
xxl garlic 20.99$
med gourmet 14.99$
lg gourmet 16.99$
xxl gourmet 21.99$
med taco 16.49$
lg taco 18.99$
xxl taco 22.99$
med ultimate 13.99$
lg ultimate 16.99$
xxl ultimate 22.99$
lg cheeese 6.99$
med 2 top 6.99$
pizza average 15.47$