revenue growth

tax rate
Mortgage rate
Mortgage for purchase

Discount rate for Leasing

Risk free rate
6.87%
MRP
8%
Beta
1
Re
14.8700%
Rd
8.75%

5%
35%
8.75%
5.75

debt
equity
D/V
E/V
WACC

Cost of leasing
year

1999
0

2000e
1

2001e
2002e
2
3
3.9
4.095 4.29975
0.925 0.962325 1.010441

revenue
lease payement
tax deduction
discounted cost
Total cost of leasing

2003e
4
4.514738
1.060963

2004e
5
4.740474
1.114011

2005e
6
4.977498
1.169712

0.32375 0.336814 0.353654 0.371337 0.389904 0.409399

0.528209 0.482765 0.445324 0.410786 0.378927 0.349539
5.41022

Cost of purchase
year

Purchase price
depreciation
tax deduction
disc.depreciation cost
PV disc.depreciation

1999
0

2000e
1

2001e
2

2002e
3

2003e
4

2004e
5

2005e
6

6.5
0.162
0.0567
0.09204

0.162
0.162
0.162
0.162
0.162
0.0567
0.0567
0.0567
0.0567
0.0567
0.08045 0.070319 0.061464 0.053724 0.046959

0.681382

Mortgage cost
tax deduction
disc.mortgage cost
PV disc.mortgage

0.503125 0.503125 0.503125 0.503125 0.503125 0.503125

0.176094 0.176094 0.176094 0.176094 0.176094 0.176094
0.28585 0.249854 0.218391 0.19089 0.166852 0.145841
2.116174

Total cost of Buying

3.702444

Discount rate for Owning

Risk free rate
6.87%
MRP
8%
Beta
1.5
Re
18.8700%
Rd
8.75%

1917
14978
0.113466
0.886534
0.138281

2006e
7
5.226373
1.228198

2007e
8
5.487692
1.289608

2008e
2009e
9
10
5.762076 6.05018
1.354088 1.421792

2010e
11
6.352689
1.492882

debt
equity
D/V
E/V
WACC

2011e
2012e
12
13
6.670323 7.00384
1.567526 1.645902

7667
14978
0.338574
0.661426
0.144068

2013e
14
7.354032
1.728197

2014e
15
7.721733
1.814607

0.429869 0.451363 0.473931 0.497627 0.522509 0.548634 0.576066 0.604869 0.635113

0.32243 0.297423 0.274356 0.253078

2006e
7

2007e
8

2008e
9

0.162
0.162
0.162
0.0567
0.0567
0.0567
0.041046 0.035877 0.031359

2009e
10

0.23345 0.215345 0.198643 0.183237 0.169026

2010e
11

2011e
12

2012e
13

2013e
14

2014e
15

0.162
0.162
0.162
0.162
0.162
0.162
0.0567
0.0567
0.0567
0.0567
0.0567
0.0567
0.02741 0.023959 0.020942 0.018304 0.015999 0.013985

0.503125 0.503125 0.503125 0.503125 0.503125 0.503125 0.503125 0.503125 0.503125

0.176094 0.176094 0.176094 0.176094 0.176094 0.176094 0.176094 0.176094 0.176094
0.127476 0.111423 0.097392 0.085128 0.074408 0.065038 0.056848 0.04969 0.043432

2015e
16
8.10782
1.905338

2016e
17
8.513211
2.000605

2017e
18
8.938871
2.100635

2018e
2019e
19
20
9.385815 9.855106
2.205667 2.31595

0.666868 0.700212 0.735222 0.771983 0.810582

0.155917 0.143825

2015e
16

2016e
17

0.13267 0.122381 0.112889

2017e
18

2018e
19

2019e
20

0.162
0.162
0.162
0.162
0.162
0.0567
0.0567
0.0567
0.0567
0.0567
0.012224 0.010684 0.009339 0.008163 0.007135

0.503125 0.503125 0.503125 0.503125 0.503125

0.176094 0.176094 0.176094 0.176094 0.176094
0.037963 0.033183 0.029004 0.025352 0.022159

Current Multiple

Ownership

Adjusted Pre-tax Income

Leasing

2,612

2,612

The EBITDA multiple doesn't take

(excluding Lexington)

difference in EBITDA

Cost of Lexington
- Interest

504

- Depreciation

162

925

1,946

1,687

- Lease Cost

Adjusted Pre-tax Income

Interest (w/o Lexington)

471

471

1,071

1,071

Lexington Interest

504

Lexington Depreciation

162

4,154

3,229

20,770

16,145

750

20,770

16,895

depreciation (w/o Lexington)

EBITDA

Multiple

Value of Operations
+ Excess Cash

Total Enterprise Value

5 x

gain in value of equity

multiple can be seen as a proxy of

1. valuate the PV of FCF of buying
2. find the new multiple
3. compute the fair equity value o
assume no transaction costs!
equity value according to DCF
Debt
Value of operation
EBITDA
Implied multiple

lease cost gain implied by new mu

- Debt (w/o Lexington)

1,917

1,917

- Lexington Debt

5,750

13,103

14,978

Equity Value

New equity value of ownership

The EBITDA multiple doesn't take the risk involved in the project and doesn't reflect correctly the future CF

difference in EBITDA

925

gain in value of equity

lease cost

4625

lease cost gain * multiple

multiple can be seen as a proxy of free cash flow valuation, this has a large impact on the multiple valuation.
1. valuate the PV of FCF of buying Lexington
2. find the new multiple
3. compute the fair equity value of ownership in substracting debt
assume no transaction costs!
equity value according to DCF
Value of operation
Implied multiple

22.47065
5.75
28
4.154
6.8

lease cost gain implied by new multiple

New equity value of ownership

6284.089
19,387

year
revenue
mortgage cost
depreciation

2001e
2002e
2
3
3.9
4.095 4.29975
0.503125 0.503125 0.503125
0.162
0.162
0.162

EBT
tax
net income

3.234875 3.429875 3.634625 3.849613 4.075349

1.132206 1.200456 1.272119 1.347364 1.426372
2.102669 2.229419 2.362506 2.502248 2.648977

interest after tax

depreciation

0.327031 0.327031 0.327031 0.327031 0.327031

0.162
0.162
0.162
0.162
0.162

FCF
disc.FCF

2.5917 2.71845 2.851538 2.991279 3.138008

2.265338 2.076912 1.904251 1.746025 1.601016

PV FCF

1999
0

22.47065

2000e
1

2003e
4
4.514738
0.503125
0.162

2004e
5
4.740474
0.503125
0.162

2005e
6
4.977498
0.503125
0.162

2006e
7
5.226373
0.503125
0.162

2007e
8
5.487692
0.503125
0.162

2008e
2009e
9
10
5.762076 6.05018
0.503125 0.503125
0.162
0.162

2010e
11
6.352689
0.503125
0.162

2011e
2012e
12
13
6.670323 7.00384
0.503125 0.503125
0.162
0.162

2013e
14
7.354032
0.503125
0.162

4.312373 4.561248 4.822567 5.096951 5.385055 5.687564 6.005198 6.338715 6.688907

1.509331 1.596437 1.687898 1.783933 1.884769 1.990647 2.101819 2.21855 2.341117
2.803043 2.964811 3.134668 3.313018 3.500286 3.696917 3.903379 4.120165 4.347789
0.327031 0.327031 0.327031 0.327031 0.327031 0.327031 0.327031 0.327031 0.327031
0.162
0.162
0.162
0.162
0.162
0.162
0.162
0.162
0.162
3.292074 3.453842
3.6237 3.80205 3.989317 4.185948
1.468113 1.346297 1.234636 1.132277 1.038441 0.952414

4.39241 4.609196 4.836821

0.87354 0.801223 0.734914

2014e
2015e
15
16
7.721733 8.10782
0.503125 0.503125
0.162
0.162

2016e
17
8.513211
0.503125
0.162

2017e
18
8.938871
0.503125
0.162

2018e
19
9.385815
0.503125
0.162

2019e
20
9.855106
0.503125
0.162

7.056608 7.442695 7.848086 8.273746 8.72069 9.189981

2.469813 2.604943 2.74683 2.895811 3.052242 3.216493
4.586795 4.837752 5.101256 5.377935 5.668449 5.973487
0.327031 0.327031 0.327031 0.327031 0.327031 0.327031
0.162
0.162
0.162
0.162
0.162
0.162
5.075827 5.326783 5.590287 5.866966 6.15748 6.462519
0.674112 0.618356 0.567226 0.520336 0.477333 0.437894

1. holding company is created to buy lexington real estate and then lease it back to TSI
2. Holding borrows money from bank to buyback lexington lease payment = 110% of annual loan (loan includes principal + interest)
3. HDC is sold to TSI
4. HDC leases lexington for 20y

HDC takes on debt + add some equity in the new holding to buy lexington
price of the lexington real estate in 1999
interest mortgage rate
mortgage contract time (years)
maximum amount TSI is willing to pay for lease annualy
annual morgage payment by HDC

6.5
8.50%
20
0.525
0.477273

Total lease payment in 2000

0.925

Lease payment that TSI has to pay to new holding

0.447727

implied new debt

Value of Lexington in 2000 (after 1year depreciation)
Hence, equity to be added to the project

5.614973
6.338
0.723

Current Multiple

Leasing

Adjusted Pre-tax Income

2.612

(excluding Lexington)

Cost of Lexington
- Interest

0.47727273

- Depreciation

0.162

- Lease Cost

0.525

Adjusted Pre-tax Income

1.4477

Interest (w/o Lexington)

0.471

depreciation (w/o Lexington)

1.0710

Lexington Interest

0.47727273

Lexington Depreciation

0.162

EBITDA

3.629

Multiple

Value of Operations
+ Excess Cash

18.1450
0.0270

Total Enterprise Value

18.1720

- Debt (w/o Lexington)

1.917

- Lexington Debt

Equity Value

16.2550

5%
year

1999
0

2000e
1

revenue
lease payement
mortgage
0.5525
total
11.6025

2001e
2002e
2
3
3.9
4.095 4.29975
0.925 0.962325 1.010441
0.5525
0.5525
0.5525

110% if the lease payment is 110%

100% then what is the annual mortgage payment with value of 100%?

5 x

(excess cash used to buy new equity in holding)

2003e
4
4.514738
1.060963
0.5525

2004e
5
4.740474
1.114011
0.5525

value exceed ownership and original leasing agreement of HDC

2005e
6
4.977498
1.169712
0.5525

2006e
7
5.226373
1.228198
0.5525

2007e
8
5.487692
1.289608
0.5525

2008e
2009e
9
10
5.762076 6.05018
1.354088 1.421792
0.5525
0.5525

2010e
11
6.352689
1.492882
0.5525

2011e
2012e
12
13
6.670323 7.00384
1.567526 1.645902
0.5525
0.5525

2013e
14
7.354032
1.728197
0.5525

2014e
2015e
15
16
7.721733 8.10782
1.814607 1.905338
0.5525
0.5525

2016e
17
8.513211
2.000605
0.5525

2017e
18
8.938871
2.100635
0.5525

2018e
2019e
19
20
9.385815 9.855106
2.205667 2.31595
0.5525
0.5525

maintenance cost
revenue growth
tax rate
Mortgage rate
Mortgage for purchase

3%
5%
35%
8.75%
5.75

Discount rate for Leasing

Risk free rate
6.87%
MRP
8%
Beta
1
Re
14.8700%
Rd
8.75%

debt
equity
D/V
E/V
WACC

NPV
year

1999
0

2000e
1

2001e
2
4.095
0.12285
0.503125
0.162
3.307025
2.149566

2002e
3
4.29975
0.128993
0.503125
0.162
3.505633
2.278661

2003e
4
4.514738
0.135442
0.503125
0.162
3.71417
2.414211

2004e
5
4.740474
0.142214
0.503125
0.162
3.933135
2.556538

2005e
6
4.977498
0.149325
0.503125
0.162
4.163048
2.705981

revenue
maintenance cost
Mortgage cost
depreciation
EBT
Net Income

3.9
0.117
0.503125
0.162
3.117875
2.026619

+depreciation
+interest after taxes

0.162
0.162
0.162
0.162
0.162
0.162
0.327031 0.327031 0.327031 0.327031 0.327031 0.327031

FCF
disc.FCF

2.51565 2.638598 2.767692 2.903242 3.045569 3.195013

2.198865 2.015904 1.848259 1.694637 1.553854 1.424829

purchase price

21.80754
6.5

NPV

15.30754

Discount rate for Owning

Risk free rate
6.87%
MRP
8%
Beta
1.5
Re
18.8700%
Rd
8.75%

1917
14978
0.113466
0.886534
0.138281

2006e
7
5.226373
0.156791
0.503125
0.162
4.404457
2.862897

2007e
8
5.487692
0.164631
0.503125
0.162
4.657936
3.027658

2008e
9
5.762076
0.172862
0.503125
0.162
4.924089
3.200658

2009e
10
6.05018
0.181505
0.503125
0.162
5.20355
3.382307

2010e
11
6.352689
0.190581
0.503125
0.162
5.496983
3.573039

debt
equity
D/V
E/V
WACC

2011e
12
6.670323
0.20011
0.503125
0.162
5.805089
3.773308

2012e
13
7.00384
0.210115
0.503125
0.162
6.128599
3.98359

7667
14978
0.338574
0.661426
0.144068

2013e
14
7.354032
0.220621
0.503125
0.162
6.468286
4.204386

2014e
15
7.721733
0.231652
0.503125
0.162
6.824956
4.436222

0.162
0.162
0.162
0.162
0.162
0.162
0.162
0.162
0.162
0.327031 0.327031 0.327031 0.327031 0.327031 0.327031 0.327031 0.327031 0.327031
3.351928 3.51669 3.689689 3.871339 4.06207 4.262339 4.472621 4.693417 4.925253
1.306571 1.198176 1.098816 1.007731 0.924228 0.847672 0.777482 0.713125 0.654114

2015e
16
8.10782
0.243235
0.503125
0.162
7.19946
4.679649

2016e
17
8.513211
0.255396
0.503125
0.162
7.59269
4.935248

2017e
18
8.938871
0.268166
0.503125
0.162
8.00558
5.203627

2018e
19
9.385815
0.281574
0.503125
0.162
8.439116
5.485425

2019e
20
9.855106
0.295653
0.503125
0.162
8.894328
5.781313

0.162
0.162
0.162
0.162
0.162
0.327031 0.327031 0.327031 0.327031 0.327031
5.16868 5.424279 5.692658 5.974456 6.270344
0.600003 0.550382 0.504877 0.463145 0.424872