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 tosell the property in a year and wants rent at that time to be high so that the property willappear 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 $2,600per month for the next 51 months. The lease cannot be broken, and the store’s WACC is12% (or 1% per month).a. Should the new lease be accepted? (Hint: Make sure you use 1% per month.)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 betweenthe new and old leases? (Hint: Find FV of the old lease’s original cost at t 5 9; thentreat this as the PV of a 51-period annuity whose payments represent the rent duringmonths 10 to 60.)c. The store owner is not sure of the 12% WACC—it could be higher or lower. At whatnominal WACC would the store owner be indifferent between the two leases? (Hint:Calculate the differences between the two payment streams; then find its IRR.)
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 $2,600
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: Make sure you use 1% per month.)
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 5 9; then
treat this as the PV of a 51-period
months 10 to 60.)
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
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