CASE STUDY 2 - AFABLE Properties Corporation Afable Properties Corporation is a family-owned corporation started by its patriarch, Manuel Afable and his wife, Lolita Afable in the 1980s. It engages in buy and sell, rentals and leases of residential and commercial properties within Laguna. Their children Dawn and Sunny took over the business after their parents went into semi-retirement. On January 8, 20XX, the Executive Committee of Afable Properties Corp. had their regular monthly meeting. One of the agenda is the acquisition of a property in a subdivision in Calamba City, Laguna. Sunny, being the VP for Marketing, is providing the details of this potential investment. Investment The property, house and lot, is situated in a 115 square meter and has four bedrooms, spacious living and dining rooms, servants' quarter, three toilet and bath and a three-car garage. In addition, a spacious garden and lanai is found on the backyard. The owner is going back to Europe and wants to dispose of the property as soon as possible. The initial price of the property is P750,000 of which 60% is attributed to the value of the lot. During the ocular visit, Sunny found out that the property was situated in a flood-prone area. In fact the house had been damaged by two floods of the previous years. The property will require renovations due to the visible damage sustained during the flood. Sunny believes that the house can be sold above the initial and renovation costs. Current market value of similar properties in the area is around 1.3M. Upon Sunny's request, Dawn -a civil engineer and the VP for Operations surveyed the property and estimated renovation cost of P350,000. Renovations will include increasing the ground level in order to prevent flood damage. Financing To finance the acquisition, Sunny suggests a mix of 80% debt and 20% equity financing. Bank loan is expected to cost 10.75%. The property will be used as security for the loan. The loan contract includes a provision of annual payments of P236,606 including interests. on the financing mix, the WACC is 11.25%. Alternatives Considering the real estate slump, Sunny suggested another way t extend the capability of the property aside from the immediate selling. The increase business activity in Calamba City results to a growing market for houses for rent in the area. The current rental rates in the subdivision is P10,000 to P25,000 per month. Sunny plans to have the place rented at P12,000 per month. However, Manuel Afable thinks that the flood history will greatly affect the market value of the property. Worst case scenario is that the property can be sold at about 15% below the expected market value. Athough, the city council of Calamba plans to improve the drainage system in the area to eventually decrease the level of flooding, if not totally prevent it. Mrs. Lolita Afable reminded them the company has established financial criteria for determining financial feasibility. This includes net present value, maximum pay back period equivalent to the term of the loan and rate of return higher than the average cost of capital. Facts and information that will be used for decision making Alternative 1-Sell the property Capital gains tax is 6% of selling price or zonal value whichever is higher Broker's and lawyer's fees would be 2% of gross selling price. Documentary stamp tax is 1.5% of selling price and other direct transfer costs is 1% of selling price. Alternative 2-Rent or lease the house Depreciation 10 years useful life Income tax 30% Operating expense is 10% of rental payments. Recovery value of the land is P1M net of transfer taxes and expenses. Alternative 3-Rent the house then sell Guide Questions: 1. Which of the above alternatives (1,2 or 3) cited will maximize the earning capability of the property? 2. What other factors will you consider in evaluating the potential property?

CASE STUDY 2 - AFABLE Properties Corporation Afable Properties Corporation is a family-owned corporation started by its patriarch, Manuel Afable and his wife, Lolita Afable in the 1980s. It engages in buy and sell, rentals and leases of residential and commercial properties within Laguna. Their children Dawn and Sunny took over the business after their parents went into semi-retirement. On January 8, 20XX, the Executive Committee of Afable Properties Corp. had their regular monthly meeting. One of the agenda is the acquisition of a property in a subdivision in Calamba City, Laguna. Sunny, being the VP for Marketing, is providing the details of this potential investment. Investment The property, house and lot, is situated in a 115 square meter and has four bedrooms, spacious living and dining rooms, servants' quarter, three toilet and bath and a three-car garage. In addition, a spacious garden and lanai is found on the backyard. The owner is going back to Europe and wants to dispose of the property as soon as possible. The initial price of the property is P750,000 of which 60% is attributed to the value of the lot. During the ocular visit, Sunny found out that the property was situated in a flood-prone area. In fact the house had been damaged by two floods of the previous years. The property will require renovations due to the visible damage sustained during the flood. Sunny believes that the house can be sold above the initial and renovation costs. Current market value of similar properties in the area is around 1.3M. Upon Sunny's request, Dawn -a civil engineer and the VP for Operations surveyed the property and estimated renovation cost of P350,000. Renovations will include increasing the ground level in order to prevent flood damage. Financing To finance the acquisition, Sunny suggests a mix of 80% debt and 20% equity financing. Bank loan is expected to cost 10.75%. The property will be used as security for the loan. The loan contract includes a provision of annual payments of P236,606 including interests. on the financing mix, the WACC is 11.25%. Alternatives Considering the real estate slump, Sunny suggested another way t extend the capability of the property aside from the immediate selling. The increase business activity in Calamba City results to a growing market for houses for rent in the area. The current rental rates in the subdivision is P10,000 to P25,000 per month. Sunny plans to have the place rented at P12,000 per month. However, Manuel Afable thinks that the flood history will greatly affect the market value of the property. Worst case scenario is that the property can be sold at about 15% below the expected market value. Athough, the city council of Calamba plans to improve the drainage system in the area to eventually decrease the level of flooding, if not totally prevent it. Mrs. Lolita Afable reminded them the company has established financial criteria for determining financial feasibility. This includes net present value, maximum pay back period equivalent to the term of the loan and rate of return higher than the average cost of capital. Facts and information that will be used for decision making Alternative 1-Sell the property Capital gains tax is 6% of selling price or zonal value whichever is higher Broker's and lawyer's fees would be 2% of gross selling price. Documentary stamp tax is 1.5% of selling price and other direct transfer costs is 1% of selling price. Alternative 2-Rent or lease the house Depreciation 10 years useful life Income tax 30% Operating expense is 10% of rental payments. Recovery value of the land is P1M net of transfer taxes and expenses. Alternative 3-Rent the house then sell Guide Questions: 1. Which of the above alternatives (1,2 or 3) cited will maximize the earning capability of the property? 2. What other factors will you consider in evaluating the potential property?

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter1: Accounting As A Form Of Communication

Section: Chapter Questions

Problem 1.12E: Accounting Principles and Assumptions The following basic accounting principles and assumptions were...

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