The store owner be indifferent between the two leases

Assignment Help Financial Management

Reference no: EM132041286

A store has 5 years remaining on its lease in a mall. Rent is $2,100 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 $2,500 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

a) Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

YES or NO

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% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: 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.

__________ %

Reference no: EM132041286

Questions Cloud

Can amara claim ownership of the property : Can Amara claim ownership of the property on her side of the fence?

Analyse the innovation system needs of a business : BSBINN502 - Build and sustain an innovative work environment - Innovation system pilot project - Analyse the innovation system needs of a business

What is the relationship between law and trade : What can you tell from the Hammurabic code about the social and family structure of Mesopotamia? What is the relationship between law and trade?

What was the gain on the futures : What was the gain on the futures? What is the total impact on the bank?

The store owner be indifferent between the two leases : Should the new lease be accepted? At what nominal WACC would the store owner be indifferent between the two leases?

Defines the concept of motivation : Select and describe a motivational theory that you would use that influences your employees to meet the organization's objectives.

Discuss potential correlated health impacts : Recent environmental disasters have significantly impacted the human population in multiple ways. In this assignment, you will identify a recent environmental.

Example of common product or service : What is an example of any common product or service other than tobacco, alcohol, gambling or pornography that would be hard for an honest person to market?

Fiedler contingency leadership model : Explanation in the potential career development lessons of Fiedler's contingency leadership model?

User Account

All Pages