how much would the value change if the owner offered to stay on for the next three y 546344

You are trying to value a bed-and-breakfast business in Vermont for its owner based upon the following information.

• The business had pre-tax operating income of $100,000 in the most recent year. This income has grown 5% a year for the last three years and is expected to continue growing at that rate for the foreseeable future.
• About 40% of this operating income can be attributed to the fact that the owner is a master chef. He does not plan to stay on if the business is sold.
• The business is financed equally with debt and equity. The pre-tax cost of borrowing is 8.00%. The beta for publicly traded firms in the hospitality business is 1.10. The treasury bond rate is 7.00%.
• The capital maintenance expenditure, net of depreciation, was $10,000 in the most recent year and it is expected to grow at the same rate as operating income.
• The business is expected to have an operating life of 10 years, after which the building will be sold at an anticipated price of $1.5 million, net of capital gains taxes.

a. Value the business, for sale.

b. How much would the value change if the owner offered to stay on for the next three years.