Sharon Evans, who graduated from the local university 3 years ago with a degree in marketing, is

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Sharon Evans, who graduated from the local university 3 years ago with a degree in marketing, is manager of Ann Naylor's store in the Southwest Mall. Sharon's store has 5 years remaining on its lease. 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 rents at that time to be high so the property will appear more valuable. Therefore, Sharon has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for zero rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and Ann Naylor Corporation's cost of capital is 12 percent (or 1 percent per month). Sharon must make a decision.

A good one could help her career and move her up in management, but a bad one could hurt her prospects for promotion.

a. Should Sharon accept the new lease?

b. Suppose Sharon decided to bargain with the mall's owner over the new lease payment. What new lease payment would make Sharon indifferent between the new and the old leases?

c. Sharon is not sure of the 12 percent cost of capital-it could be higher or lower. At what nominal cost of capital would Sharon be indifferent between the two leases?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Fundamentals of Financial Management

ISBN: 978-0324272055

10th edition

Authors: Eugene F. Brigham, Joel F. Houston

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