P5-3 Sunder Properties Brighton Holdings owns private companies and hires profes
ID: 330632 • Letter: P
Question
P5-3 Sunder Properties Brighton Holdings owns private companies and hires professional managers to run its companies. One company in Brighton Holdings' portfolio is Sunder Properties. Sunder owns and operates apartment complexes, and has the following operating statement. SUNDER PROPERTIES (Last Fiscal Year) (Millions) Revenues Expenses* Net income before taxes $86.50 (72.30) $14.20 Includes interest expense of $2.6 million. Brighton Holdings estimates Sunder Properties' before-tax weighted average cost of capital to be 15 percent. Brighton Holdings rewards managers of their operating companies based on the operating company's before-tax return on assets. (The higher the operating company's before-tax ROA, the more Sunder managers are paid.) Sunder Properties' total assets at the end of the last fiscal year are $64 million.Explanation / Answer
a) Given, For Sunder Properties:
Net Income before Tax, NI = $ 14.20 Million
Also, Total Asset of the last Fiscal Year , TA: $ 64 Million
Now, ROA = NI / TA = 14.20 / 64 = 22.18 %
b) Financila of Valley View is given as,
Revenue = $ 16.6 Million
Expense = $ 13.30 Million
Net Income , NI = (16.6 - 13.3 ) = $ 3.3 Million
Total Asset of new Apartment, TA = $ 20.0 Million
ROA = 3.3 / 20 = 16.5 %
Since ROA of Valley view is less than ROA of Sunder Properties hence the acquisition of the Valley View will lower the value of the Sunder properties, hence the manager should not purchase it.
c) The Shareholder would accept the acquisition of valley view. As the acquisition will give positive return.
d) In my view, it should be rejected because it will lower the shareholder's value.
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