Brighton Holdings owns private companies and hires professional managers to run its companies. One company in Brighton Holdings’ portfolio is Sunder Properties. Sunder owns and operates apartment complexes, and has the following operating statement.

(Last Fiscal Year)
Revenues....... $ 86.50
Expenses ....... * (72.30)
Net income before taxes.. $ 14.20
Brighton Holdings estimates Sunder Properties’ before- tax weighted average cost of capital to be 15 percent. Brighton Holdings rewards managers of their operating companies based on the operating company’s before- tax return on assets. (The higher the operating company’s before- tax ROA, the more Sunder managers are paid.) Sunder Properties’ total assets at the end of last fiscal year are $ 64 million.

a. Calculate Sunder’s ROA last year.
b. Sunder management is considering purchasing a new apartment complex called Valley View that has the following operating characteristics (millions $):
Will the managers of Sunder Properties purchase Valley View?
Revenues ........ $ 16.60
Expenses *......... $ 13.30
Total assets of new apartment... $ 20.00

c. If they had the same information about Valley View as Sunder’s management, would the shareholders of Brighton Holdings accept or reject the acquisition of Valley View in part (b)?
d. What advice would you offer the management team of Brighton Holdings?

  • CreatedDecember 15, 2014
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