1. Go on-line to into the Search Stocks field and click on the magnifying glass button.
What is the beta for DMP?
Repeat for “RFG.AX”, which is another company listed on the Australian Stock Exchange, which owns the franchise for Pizza Capers, a competitor of DMP, along with a number of other franchises.
What is the simple average beta of the two stocks?
Explain whether and why you think DMP and RFG are more sensitive to the risks the market is exposed to than average stock top 200 stock listed on the Australian Stock Exchange.
2. Go on-line to
What is the Yield (Interest Rate) on a 15-year Australian Government Bond?
3. Assuming an Equity Market Risk Premium of 6.5%; a beta equal to the average beta of DMP and RFG calculated above; and a risk-free rate equal to the yield on a 15-year Australian Government bond, estimate the required return using CAPM.
As the required return you have calculated is appropriate for a large franchisee and as we are wanting to estimate the required return on a single small franchisor, add an additional risk premium to the CAPM-based required return to provide some compensation for the additional risks of a small company. If you assumed that 5% was a reasonable small company risk premium what would be the required return you estimate for valuing the pizza franchise you are considering buying?
4. Franchisees are allowed to fund up to 30% of the cost of the franchise with debt capital. Assuming Tien will fund the acquisition with 30% debt capital and 70% equity capital, and assuming the cost of equity you have calculated above and a cost of debt equal to a rate of interest equal to that of the Business Loan you identified in Task 2 of the Case Study, estimate the after-tax Weighted Average Cost of Capital for the franchise.
5. Assume that you can purchase a Domino’s franchise for around $560,000, plus an initial franchise fee, and assume that Tien is planning to build up the franchise over the next four years before selling the franchise at the end of the fourth year. You estimate he can sell the franchise for approximately $1 million at the end of the fourth year.
Calculate the NPV of the investment, incorporating your estimate of the total initial investment required; the free cash flows as you estimated for the first four years in Task 2; and your estimate of the terminal value of the investment at the end of the fourth year (the selling price in four years time).
6. Advise Tien as to the financial worth of the proposed investment in a Domino’s Pizza Enterprise franchise, including in your advice an explanation as to the significance of a positive showing a positive or a negative NPV.
7. Provide 5 key points to support your investment advice to Tien.
8. Provide 5 key points summarizing the major risks, which Tien would face in making this investment.
Note that this example oversimplifies a more realistic budget forecast. For instance, it does not allow for the effect of inflation on revenues and costs. It also does not include the significant contribution of products other than pizza, such as drinks and desert.