Question

Information text Use the following information for questions 29 – 34, each question is worth_________. Before attempting to answer the questions, set up an analysis based on the given information. Chilly Cloud Corporation (C3) operates several information technology hubs, including cloud storage, disaster recovery, and racks for lease to businesses needing additional space for their own IT needs. C3 is growing rapidly and anticipates adding 20,000 SF per year for the next five years. C3’s CFO, Dave, is analyzing several options for acquiring the expected space over the next five years. There are many options; first, they could build a new building to add the expected space needed, second, they could build a new corporate office which would include the existing corporate needs as well as the expected space anticipated to be needed. Both of these options could be expanded to buying and renovating existing buildings. In addition, C3 has the option to lease property in increments that enable them to move into the needed space as the growth occurs. The rates will vary according to when and for how long they decide to lease. Also, the location could vary if it is financially advantageous and not disruptive to the operation. They also have an option to build to suit on one of the sites that are also available for construction of an owned building. C3 currently occupies 80,000 square feet in a building they own. There is no space available to expand, so in every option, C3 must dispose of the existing property or operate from multiple locations. The expected market value of the existing property is $7.2 million. The basis in the property is $2.7 million and C3 is in a 21% tax bracket. C3 wants Class A property as part of the brand they are projecting. Construction rates are between $85-115 per square foot, including property, to build before tenant finishes above standard. Lease rates are between $21-27 per square foot to lease, again at standard finishes. C3 estimates that they will spend $1.25-1.5 million on upgrades or tenant finishes in any scenario. Assuming a five-year horizon, answer the following questions with the information provided. Do not forget the tax effect on the cashflow of periodic rent and mortgage payments when calculating present values.

Question 29 Given the facts above and that the expected selling expenses would be 8% of the selling price; what is the expected net cash from sale? Select one: a. $6.624.000 b. $3,924,000 c. $5,799,960 d. $6,375,960 e. None of the above

Question 30 Assuming a weighted average cost of capital of 23%, what is the present value of the after-tax cash flow required, exclusive of the tenant improvements, on a five-year lease for 180,000 square feet (projected total required over five-year period) at a rate of $22.50 per square foot annually? Assume payments are made monthly. Select one: a. $8,969,713. b. $9,457,983 c. $15,997,500 d. $7,192,825 e. None of the above

Question 31 Answer saved Points out of 5.0 Flag question Question text Assume C3 has the opportunity to execute a lease with options to add 20,000 SF over each of the next four years; however, to do that they would have to agree to bumps in rent of $.75 per SF annual rent on the entire leased space. Assuming no additional moving costs or other logistical issues, how much would they save in gross rent? Select one: a. $3,300,000 b. $2,718,655 c. $2,514,560 d. $6,020,661 e. None of the above

Question 32 Answer saved Points out of 5.0 Flag question Question text Assume the WACC is 23% and payments are made monthly. What is the present value of the after-tax cash flow required for the modified lease option with incremental increase in space and rent describe in the question above? Select one: a. $7,192,825 b. $7,310,243 c. $8,839,506 d. $6.020.661 e. None of the above

Question 33 Answer saved Points out of 5.0 Flag question Question text If C3 elects to build, using the median construction cost estimate ($100/SF), compute the net present value assuming the building will be occupied simultaneously to the sale of the existing building in one year. Include the cost of a construction loan at 6.5% annual interest rate, with construction draws commencing in 3 months and being incurred evenly over the remaining 9 months. Assume the construction loan agreement requires C3 to put the first 25% estimated construction costs into the project before the draws can be made and interest to be rolled into the loan monthly. Assume C3 expects to convert the 75% construction loan into a five-year term loan with monthly payment of principal and interest amortized over 20 years at 6.5%. Assume a sale at the end of five years at a compound 3% increase in value. Depreciation on the building is calculated at 39 years and selling costs are estimated to be 8%. C3 intends to withdraw the equity paid from operating cashflow from the proceeds of the sale and net the balance against the required loan. What is the net present value of the of cash flows for the acquisition/construction of the building? Select one: a. $5,682,854 b. $7,192,825 c. $6,020,661 d. $8,544,415 e. None of the above

Question 34 Answer saved Points out of 5.0 Flag question Question text Using the information above, including the previous question, what is the present value of the sale of the new building, discounted at the WACC (23%), assuming it occurs at the and of the fifth year. Select one: a. $5,799,960 b. $6,020,661 c. $2,944,941 d. $2,827,835 e. None of the above

Answer 1

29]

net sale price = gross sale price - selling expenses = $7,200,000 - (8% of $7,200,000) = $6,624,000

tax on sale = (net sale price - basis) * tax rate = ($6,624,000 - $2,700,000) * 21% = $824,040

net cash from sale = net sale price - tax on sale = $6,624,000 - $824,040 = $5,799,960

30]

Present value is calculated using PV function in Excel :

rate = 23% / 12 (converting annual discount rate into monthly rate)

nper = 5 * 12 (5 years with 12 monthly lease payments each year)

pmt = 180,000 * 22.5 * 0.79 / 12 (monthly after tax lease payment = SF * annual rent per SF * (1 - tax rate) / number of months in year)

PV is calculated to be $9,457,983

31]

Total rent without incremental option = SF * annual rent per SF * number of years =  180,000 * $22.5 * 5 = $20,250,000

With incremental option, rent in each year is calculated as :

Year 1 = 100,000 SF * $22.5 = $2,250,000

Year 2 = 120,000 SF * ($22.5 + $0.75) = $2,790,000

Year 3 = 140,000 SF * ($22.5 + $0.75 + $0.75) = $3,360,000

Year 4 = 160,000 SF * ($22.5 + $0.75 + $0.75 + $0.75) = $3,960,000

Year 5 = 180,000 SF * ($22.5 + $0.75 + $0.75 + $0.75 + $0.75) = $4,590,000

Saving in gross rent = $20,250,000 - ($2,250,000 + $2,790,000 + $3,360,000 + $3,960,000 + $4,590,000) = $3,300,000

32]

Monthly after-tax lease payment = yearly payment * (1 - tax rate) / number of months in year

Year 1 = $2,250,000 * (1 - 21%) / 12 = $148,125

Year 2 = $2,790,000 * (1 - 21%) / 12 = $183,675

Year 3 = $3,360,000 * (1 - 21%) / 12 = $221,200

Year 4 = $3,960,000 * (1 - 21%) / 12 = $260,700

Year 5 = $4,590,000 * (1 - 21%) / 12 = $302,175

The present value of each month's after-tax lease payment is calculated as :

Monthly after-tax lease payment / (1 + (0.23 / 12))^month

In this way, the present value of each month's after-tax lease payment is calculated. The sum of all the months' present values is the total present value of the modified lease option

the total present value of the modified lease option is $7,310,244