Case 2: Health Development Corporation HBS 9-200-049

1. Did the purchase of the Lexington Club real estate increase the value of Heatlh Development Corporation (HDC)? Calculate the NPV of the purchase.

• Use pre-tax cashflows.

• Assume the revenues of the Lexington Club grow by 5% per year.

• Assume that the appropriate discount rate for real estate cashflows was 10%.

• Assume a 20 year life of the facility.

(Hint: In calculating the NPV of the decision to buy the real estate, you only need to consider the incremental cashflows resulting from the decision).

NPV=

=11203677.75 – 6,500,00 = $4,703,677.75

Assumptions:

• The change in incremental cash flow can be examined through looking at the factors causing change
*…show more content…*

The holding company is owned by the shareholders of HDC.

• HDC is then sold to TSI for an amount $X (which equals TSI’s valuation of HDC in this agreement).

• The agreement to sell HDC to TSI includes the sale of the Lexington Club by HDC to ABC for $6.5 million.

• HDC leases back the Lexington Club for 20 years at $525,000 per year.

• The bank lends amount $Y to ABC for the purchase of Lexington. The bank loan is repaid in 20 equal, year-end, payments. However, the bank insists that the lease payments must be 110% of the annual repayments of the bank loan. Note that the equal bank loan repayments include interest and principal.

• The original owners of HDC put in an initial equity of $(6.5 mn – Y) into ABC to make up the difference between the purchase price and the bank loan.

3. How much is Y?

Interest Rate: r =8. 5%

Annual Mortgage Repayments: C= $ 477,272.73 being of $525,000.

Loan length: 20 years, t=20

4. How much is X?

EBITDA $ 3,229,000.00

New Lease difference $ 400,000.00

New EBITDA $ 3,629,000.00

Multiple $ 18,145,000.00

Mortage -$ 5,750,000.00

Sale $ 6,500,000.00 $ 18,895,000.00

Less Debt $ 1,917,000.00

Equity Value $ 16,978,000.00

Assumptions:

• The interest payment of 504 has been paid for 1999 and is not due for 2000.

• That the 6.5 -y is an additional injection of equity by the shareholders of

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