Consider this information for all the following questions. Errata: The line reading "Pay (1-D/(D+E))%..." should read "Pay (1-D)/(D+E)%..." Valuing an Entity with Buy-Manage-Sell Model Introduction Urstadt Biddle Properties Inc. (UBA) is a profitable, debt-free REIT that invests in grocery store, pharmacy and dollar store buildings. Although the company has been operating in steady-stare for years, its share price has collapsed during the Covid Pandemic, along with REITs fofused on office buildings and theatres. (The above is a simplified but basically true story. The mumbers below are simplified for this problem). Your PE fim is considering buying UBA at the asking price of $400 MM This corresponds to a PE ratio of: 5.86 Your firm believes that an optimal capital structure for the fim would be: 40% D/(DE) If your fimm buys UBA, it will: - Pay (1-D/(D+E))% of the purchase price with your firm's funds - Have the firm take out a loan at the moment of close, to pay the current owners the rest of the purchase price. -Operate UBA in its recapitalized steady-state for four years. - Sell UBA at the end of this time, when you believe the entity's PE ratio will have recovered to a more nommal value of 7.9121 Financing Structure D+E= CAPE D/(D+E) = Wp D E Existing As purchased $400 $400.0 0.0% 40.0% S0.0 1 $400.0 2 Key Rates Io (Pre-tax) Existing As purchased 6.0000% 7.0000% 6.5000% 8.88339 6.5000% le Income Tax rate 8.8833% 35.00% Free Cash Flows FCF = Free Cash Flows to Shareholders Existing Income Statement D=$0.0 Revenue $400.00 - Depreciation ($150.00) - Other Expenses ($145.00) E EBIT $105.00 As Purchased $400.00 ($150.00) ($145.00) $105.00 -Interest - =NI $0.00 ($36.75) $68.25 3 4. $60.9700 Accept this as correct, even if it does not add up for you. - A Working Capital + Depreciation = CF $0.00 $150.00 $218.25 operations, E - CAPX + A Debt = FCFE ($150.00) $0.00 $68.25 5 Valuation at T=0 T4 NPVE = -Pp, E + 2 FCFE, / (1+re)" + Sp, E/ (1+IE) Spe 6 NPVE = 7 5 1 What is quanity 5? 6 1 What is quantity 6? 1 What is quantity 7? 8 1 According to this model, should your firm buy UBA? Yes No