Reference no: EM133068555

Problem 1: Taylor Johnson is the operations manager for Handy Andy, a small privately-owned chain of mid-sized hardware stores in the Houston metro area. Due to increased competition from large Home Depot and Lowes stores in this market, she is developing a proposal to acquire a competitor with smaller local neighborhood stores which are more differentiated from the larger competitors. Handy Andy's stores are typically about 8000 square foot in size, and produce annual revenues of $138/square foot, with operating profit margins of 15% of revenues. While Handy Andy has not sold any of its stores yet, some of its direct competitors have recently sold comparable assets at an average price of $2.5 million per store.

a) What is the NOI multiple implied by the comparable sales information for mid-size stores? (Hint: NOI = Revenues - Operating Costs).

b) Taylor has data indicating that smaller neighborhood hardware stores (typically 5,500 square feet in size) generate slightly less revenue per square foot ($125/square foot), but they also have a higher operating profit margin (20% of Revenues). Use this information to determine the typical NOI and then use the multiple from part a) to develop an acquisition price for a smaller store.

c) Split the NOI multiple from part a) into Revenue and Operating cost multiples and then use those multiples to value a smaller store as a function of its typical Revenue and Operating Cost. Assume that the cap rate for Operating Cost is approximately equal to the borrowing cost of 5%.