You are required to value a new business, West Pentire Apartments Ltd, which involves the acquisition...

    

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You are required to value a new business, West Pentire Apartments Ltd, which involves the acquisition of a new complex of residential apartments to let. You must forecast the annual financial statements over a 6-year horizon, and perform a discounted cash flow valuation of the business. Further information about the business is provided below. Non-Current Assets: • Land and improvements: £6,820,000 • Buildings and improvements: £11,100,000 Furnishings and equipment: £214,000 - Furnishing and Equipment has a useful life 6 years Furnishing and equipment has no residual values The straight-line depreciation method is used Equity and Long-Term Debt: • Long-term loan: £7,500,000 Income . Number of years: 25 years (repaid in equal installments) Interest rate: 6.0% per annum Equity (capital contributed by the owners): £11,500,000 Number of shares outstanding: 12,000 Expected return on equity: 10.5% per annum Apartment units: Two-Bedroom apartment: 55 units - One-Bedroom apartment: 150 units - Studio apartment: 85 units Monthly rents for the first year: Two-Bedroom apartment: £1800 per month One-Bedroom apartment: £945 per month Studio apartment: £650 per month The expected vacancy rates are shown below: Year 1 5.0% Estimated vacancy rates for each year Year 5 Year 2 4.5% 4.0% Year 3 Year 4 3.5% 3.5 % Monthly rents are expected to increase each year as shown below: Estimated increase in rents for each year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 n/a 4.0% 4.0% 3.0% 2.0% 2.0% Expenses • The operating expenses for the first year are shown below: Expense Management fees Salary expense Utilities Insurance Supplies Advertising Maintenance and repairs Property taxes Year 1 5.0% of EGI £55,000 £35,000 Year 6 3.5% £10,000 £10,000 £15,000 £105,000 £155,000 Expenses . . n/a Other Information • • 4.0% 4.0% 3.0% • Management fees are equal to 5.0% of Effective Gross Income (EGI). EGI is defined in the financial statement structure provided in Appendix C . The operating expenses for the first year are shown below: Expense • Property taxes are expected to increase to £205,000 for Year 5 onwards. . Management fees Salary expense Utilities 2.0% Insurance Supplies Advertising Maintenance and repairs Property taxes Year 1 5.0% of EGI £55,000 £35,000 £10,000 £10,000 £15,000 £105,000 £155,000 2.0% • The tenant deposit amounts for each year are shown below: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 £112,860 £117,992 £123,354 £127,717 £130,271 £132,876 E132,876 All other operating expenses (i.e. excluding management fees and property taxes) are expected to increase each year at 2.0% per annum. All long-term debt and equity will be issued by the end of Year 0. All capital expenditures will be made by the end of Year 0. Each year, the closing receivables balance is 5.0% of EGI, and the closing payables balance is 5.0% of operating expenses excluding depreciation. Corporation tax is equal to 20% of income before tax. The business only pays corporation tax if it is making a profit. The company's weighted average cost of capital (WACC) should be calculated using book values for Year 0. Assume that the company's WACC is constant each year. After Year 6, the free cash flow of the business will grow at the perpetuity growth rate of 2.0% per annum. 6 Expenses . . n/a Other Information • • 4.0% 4.0% 3.0% • Management fees are equal to 5.0% of Effective Gross Income (EGI). EGI is defined in the financial statement structure provided in Appendix C . The operating expenses for the first year are shown below: Expense • Property taxes are expected to increase to £205,000 for Year 5 onwards. . Management fees Salary expense Utilities 2.0% Insurance Supplies Advertising Maintenance and repairs Property taxes Year 1 5.0% of EGI £55,000 £35,000 £10,000 £10,000 £15,000 £105,000 £155,000 2.0% • The tenant deposit amounts for each year are shown below: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 £112,860 £117,992 £123,354 £127,717 £130,271 £132,876 E132,876 All other operating expenses (i.e. excluding management fees and property taxes) are expected to increase each year at 2.0% per annum. All long-term debt and equity will be issued by the end of Year 0. All capital expenditures will be made by the end of Year 0. Each year, the closing receivables balance is 5.0% of EGI, and the closing payables balance is 5.0% of operating expenses excluding depreciation. Corporation tax is equal to 20% of income before tax. The business only pays corporation tax if it is making a profit. The company's weighted average cost of capital (WACC) should be calculated using book values for Year 0. Assume that the company's WACC is constant each year. After Year 6, the free cash flow of the business will grow at the perpetuity growth rate of 2.0% per annum. 6 4. The business is considering charging tenants for parking in addition to rent. Parking cost/unit is £2,500 per year. Create a new worksheet named "Parking" and calculate the annual net income figures, with parking included. Provide a suitable chart to compare net income with and without parking. 9/12 ... ... You are required to value a new business, West Pentire Apartments Ltd, which involves the acquisition of a new complex of residential apartments to let. You must forecast the annual financial statements over a 6-year horizon, and perform a discounted cash flow valuation of the business. Further information about the business is provided below. Non-Current Assets: • Land and improvements: £6,820,000 • Buildings and improvements: £11,100,000 Furnishings and equipment: £214,000 - Furnishing and Equipment has a useful life 6 years Furnishing and equipment has no residual values The straight-line depreciation method is used Equity and Long-Term Debt: • Long-term loan: £7,500,000 Income . Number of years: 25 years (repaid in equal installments) Interest rate: 6.0% per annum Equity (capital contributed by the owners): £11,500,000 Number of shares outstanding: 12,000 Expected return on equity: 10.5% per annum Apartment units: Two-Bedroom apartment: 55 units - One-Bedroom apartment: 150 units - Studio apartment: 85 units Monthly rents for the first year: Two-Bedroom apartment: £1800 per month One-Bedroom apartment: £945 per month Studio apartment: £650 per month The expected vacancy rates are shown below: Year 1 5.0% Estimated vacancy rates for each year Year 5 Year 2 4.5% 4.0% Year 3 Year 4 3.5% 3.5 % Monthly rents are expected to increase each year as shown below: Estimated increase in rents for each year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 n/a 4.0% 4.0% 3.0% 2.0% 2.0% Expenses • The operating expenses for the first year are shown below: Expense Management fees Salary expense Utilities Insurance Supplies Advertising Maintenance and repairs Property taxes Year 1 5.0% of EGI £55,000 £35,000 Year 6 3.5% £10,000 £10,000 £15,000 £105,000 £155,000 Expenses . . n/a Other Information • • 4.0% 4.0% 3.0% • Management fees are equal to 5.0% of Effective Gross Income (EGI). EGI is defined in the financial statement structure provided in Appendix C . The operating expenses for the first year are shown below: Expense • Property taxes are expected to increase to £205,000 for Year 5 onwards. . Management fees Salary expense Utilities 2.0% Insurance Supplies Advertising Maintenance and repairs Property taxes Year 1 5.0% of EGI £55,000 £35,000 £10,000 £10,000 £15,000 £105,000 £155,000 2.0% • The tenant deposit amounts for each year are shown below: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 £112,860 £117,992 £123,354 £127,717 £130,271 £132,876 E132,876 All other operating expenses (i.e. excluding management fees and property taxes) are expected to increase each year at 2.0% per annum. All long-term debt and equity will be issued by the end of Year 0. All capital expenditures will be made by the end of Year 0. Each year, the closing receivables balance is 5.0% of EGI, and the closing payables balance is 5.0% of operating expenses excluding depreciation. Corporation tax is equal to 20% of income before tax. The business only pays corporation tax if it is making a profit. The company's weighted average cost of capital (WACC) should be calculated using book values for Year 0. Assume that the company's WACC is constant each year. After Year 6, the free cash flow of the business will grow at the perpetuity growth rate of 2.0% per annum. 6 Expenses . . n/a Other Information • • 4.0% 4.0% 3.0% • Management fees are equal to 5.0% of Effective Gross Income (EGI). EGI is defined in the financial statement structure provided in Appendix C . The operating expenses for the first year are shown below: Expense • Property taxes are expected to increase to £205,000 for Year 5 onwards. . Management fees Salary expense Utilities 2.0% Insurance Supplies Advertising Maintenance and repairs Property taxes Year 1 5.0% of EGI £55,000 £35,000 £10,000 £10,000 £15,000 £105,000 £155,000 2.0% • The tenant deposit amounts for each year are shown below: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 £112,860 £117,992 £123,354 £127,717 £130,271 £132,876 E132,876 All other operating expenses (i.e. excluding management fees and property taxes) are expected to increase each year at 2.0% per annum. All long-term debt and equity will be issued by the end of Year 0. All capital expenditures will be made by the end of Year 0. Each year, the closing receivables balance is 5.0% of EGI, and the closing payables balance is 5.0% of operating expenses excluding depreciation. Corporation tax is equal to 20% of income before tax. The business only pays corporation tax if it is making a profit. The company's weighted average cost of capital (WACC) should be calculated using book values for Year 0. Assume that the company's WACC is constant each year. After Year 6, the free cash flow of the business will grow at the perpetuity growth rate of 2.0% per annum. 6 4. The business is considering charging tenants for parking in addition to rent. Parking cost/unit is £2,500 per year. Create a new worksheet named "Parking" and calculate the annual net income figures, with parking included. Provide a suitable chart to compare net income with and without parking. 9/12 ... ...