A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month,

Question

A store has 5 years remaining on its lease in a mall. Rent is $2,000 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 $2,700 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 196 per month). a. Should the new lease be accepted? (Hint: Be sure to use 196 per month.) -Select- b. If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t-9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Round your answer to the nearest cent. Do not round your intermediate calculations. c. The store owner is not sure of the 12% ACC it could be h gher or lower. At what nom na WACC wou d the store o ne Calculate the differences between the two payment streams; then find its IRR.) Round your answer to two decimal places. Do not round your intermediate calculations. e indifferent between the two eases

Explanation / Answer

a) Old rents - 2000 p.m. for 60 months New rents - 2700 p.m. for 51 months(From 10 to 60) Present value of both Old New Monthly rentals A 2000 2700 Annuity factor for 60 months @ 1% p.m. 44.9550 44.9550 Less : Annuity factor for first 9 months 8.5660 Net annuity factor B 44.9550 36.3890 PV of lease payments (A x B) 89910.08 98250.36 New lease schedule is benificial. b) Let the new monthly lease rent be L At indifference point - L x 36.3890 = 89910.08 L = 89910.08/36.3890 2470.802 c) Let Rate be r - At indifference point - 2000 x PVAF(r, 60) = 2700 X [PVAF(r,60) - PVAF (r,9)] PVAF(r, 60) = 2700/2000 X [PVAF(r,60) - PVAF (r,9)] PVAF(r, 60) = 1.35 x [PVAF(r,60) - PVAF (r,9)] PVAF(r,60) = 1.35PVAF(r,60) - 1.35PVAF (r,9) PVAF(r,9) = 0.35 x PVAF (r,60) PVAF(r,9) - 0.35 x PVAF (r,60) = 0 Using Linear Interpolation - At r RHS 4% -0.4829 r 0 0.9655 5% 0.4826 0.500155 (r - 4)/(5-4) = (0-(-0.4829))/(0.4826-(-0.4829)) r-4 = 0.4829/0.9655 r = 4+ 0.500155 r =4.500 WACC = 4.5% Please provide feedback.. Thanks in advance.. :-)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.