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' 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 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.) 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 indiff 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 payme represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent. 2470.80 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 leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your an
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' 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 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.) 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 indiff 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 payme represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent. 2470.80 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 leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your an
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 $2,500 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.)
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.) Do not round intermediate calculations. Round your answer to the nearest cent.
$
2470.80
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.) Do not round intermediate calculations. Round your answer to
two decimal places.
1.91
%
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