Reference no: EM131941328
Question: You have been appointed as a consultant to Texas Bob's BBQ shack, Inc., a restaurant chain based in Austin, Texas. The company is considering expanding into the Cincinnati market and has retained you to advise it on an appropriate real estate strategy. The standard real estate strategy when entering a new market has been to work with a local partner who will identify, purchase and retain ownership of a suitable building. Texas Bob then takes a ten-year net lease on the property. However, in this instance, because of the large fall in commercial real estate prices, Texas Bob has asked you to investigate the feasibility of purchasing a building instead of leasing one. The company has identified a suitable freestanding building of 7,750 square feet that is available to either lease or purchase. You are provided with the following information:
Option 1 - lease The property can be leased for $15 per square foot on a ten-year (net) lease. The lease includes a CPI adjustment. Over the next ten years inflation is expected to average 2.5%.
Option 2 - purchase The property can be purchased for $90 per square foot. Financing terms are based on a mortgage of 65% LTV. The interest rate is 350 basis points above ten-year Treasury Bonds (currently trading at 1.90%). The loan term would be ten years and the loan would also be amortized over a 30-year period (assume one-payment per year with interest compounding annually). Over the last thirty years commercial property prices have increased by two percent per year in Cincinnati. From the local tax assessment records, the value of improvements on the site is given as 50% of the assessed value.
The company anticipates that sales at the new location will average $57,000 per week, with the costs of goods sold expected to average 70% of the sales level. Sales are expected to grow at 6% per year. Corporate overheads are expected to increase by $8,100 a week as a result of the new restaurant (increasing by 3% per year). Fitting out the restaurant is expected to cost $350,000 regardless of whether the property is leased or purchased. Property operating expenses are calculated at $5 per square foot in the first year of occupancy rising by 3% per year. The marginal tax rate for the company is 25%, the rate of depreciation recapture is 25%, and the capital gain tax rate is 15%. In your report to the company Texas Bob has asked that you address the following questions:
(a) What is the after-tax return to the company from opening the new restaurant assuming the building is leased?
(b) What is the after-tax return to the company from opening the new restaurant assuming the building is purchased?
(c) What is the after-tax incremental return from purchasing the restaurant rather than leasing it?
(d) State which is the preferred option based on your analysis. Is there any other advice you would offer the company on the buy versus lease decision?
|
What is the required return
: Ayden, Inc., has an issue of preferred stock outstanding that pays a dividend of $4.15 every year, in perpetuity. This issue currently sells for $95 per share.
|
|
What is that rent worth to prospero today
: When Prospero retires, what minimum rent per acre should Prospero charge Miranda? Assume a 5% discount rate and 0% growth and that Miranda will pay the amount.
|
|
Calculate the firm income before taxes
: Banana Box Corporation has sales of $4,806,740 income tax of $538,728 the selling general and administrative expense of $288,366 depreciation of $323,841.
|
|
Plot the average tax rates against the pretax income levels
: Plot the average tax rates (measured on the y axis) against the pretax income levels (measured) on the x axis). what is generalization can be made concerning.
|
|
What is the after-tax incremental return
: What is the after-tax incremental return from purchasing the restaurant rather than leasing it? State which is the preferred option based on your analysis.
|
|
What is the company total debt
: Balance Sheet The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.5 million.
|
|
Complete at least three sections of the problem
: For this scenario, complete the 8D form. Complete at least three sections of the Is/Is Not form to better describe the problem.
|
|
What will be the net present value of the equipment
: Baker Corporation is considering the purchase of a piece of equipment for $2,100 that will be used for three years.
|
|
How many years do the bonds have left
: Backwater Corp. has 6 percent coupon bonds making annual payments with a YTM of 5.3 percent. The current yield on these bonds is 5.65 percent.
|