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).
- Should the new lease be accepted? (Hint: Be sure to
use 1% per month.)
-Select-Yes/No
- 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.
= $
- 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.
- = %