A store has 5 years remaining on its lease in a man. Kent is 52, 000 per month,
ID: 2741071 • Letter: A
Question
A store has 5 years remaining on its lease in a man. Kent is 52, 000 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2, 600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). Should the new lease be accepted? If the store owner decided to bargain with the mail's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and the old leases? Round your answer to the nearest cent. Do not round your intermediate calculations. The store owner is not sure of the 12% WACC - it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? Round your answer to two decimal places. Do not round your intermediate calculations.Explanation / Answer
a) No.
Only if the Future Value (FV) of the new lease payment is less than or equal to the old lease payment the new lease should be accepted. In this the FV of new lease payment is greater than old lease payment.
Calculation: Old lease- Payment = 2000, r = 1% n = 60, so FV = 163,339.34
New lease - Payment = 2600, r = 1%, n = 51 so FV = 171880.32
To calculate FV use either excel FV function of the following formula:
FV = Monthly Payment * ((1+r)^1 + (1+r)^2+.....+(1+r)^n)
b) 2,470. 80
Calculation:
Old Lease- Payment = 2000, r = 1%, n = 60 months, we have to calculate Future Value (FV) i.e. value of the monthly payments at end of 60 months. We can use excel FV function or use the following equation to solve it:
FV = 2000*((1.01)^1 + (1.01)^2 + ......+ (1.01)^60) = 163339.34
Now we need to find out the value of 163339.34 at end of 9 months so we have FV = 163339.34, n = 51 months , r =1 %. Present Value (PV) has to be calculated. We can use excel PV function or the following formula
PV = 163339.34/(1.01)^51 = 98333.33
To make the store owner indifferent the PV of new new lease payments should be 98333.33 so we have PV = 98333.33, r =1 %, n = 51. Using excel pmt function we get Payment = 2470.80. This is the value at which store owner would be indifferent between old and new lease
c) 22.94% annual WACC, Monthly WACC = 22.94%/12 = 1.911% = r
Calculation:
Solve the following equation to get the value of r:
2000*((1+r)^1 + (1+r)^2 + .....+ (1+r)^60) = 2600*((1+r)^1 + (1+r)^2 + .... + (1+r)^51)
Alternatively we can use excel IRR function to find the value of r using the the following cash flow streams
CF1 to CF9 = 2000 and CF10 to CF60 = -600. Where CFn denotes the cash flow at n th period. For first 9 periods we have one cash flow stream of old lease payment and for the remaining 51 period we take the difference between the old and new lease payments.
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