The Threshold Sports, LLC -

Does Threshold already have high financial leverage? Here is some helpful information that we were given

1. Threshold has no debt but the lease payments for the First Union Title Series can be functionally considered debt. The amount of debt is the present value of the lease payments.
2. Th question is: Is this just a 5-year lease or should it be thought of as a perpetual lease?
3. 5-year lease:
   1. The lease payments start at $200,000 in 2001 and end at $260,000 in 2005.
   2. So you can make a guess that the lease payments in 2002, 2003, and 2004 would be $215,000, $230,000, and 245,000, respectively.
   3. If the cost of capital, k, is 13.1%, then what is the Present Value of the 5 lease payments?
   4. This would be the Debt under the 5-year lease scenario.
4. Perpetual lease: Given that this is probably not a 1-time 5-year lease, but is renewable at the end of its term, perpetually, then what is the PV of the lease? To find out, we need to know what the annually compounded growth rate is of the lease payments.
   1. CAGR: Lease payment 1 = $200K, Lease Payment 5 = $260K
   2. That means 4 years of growth in lease payments (5 payments, 4 years of growth)
   3. Use the formula: FV = PV x (1 + g)^4 and solve for g.
   4. Then, you can find the PV of a growing perpetuity as Lease payment in 2001 / (k g)