You manage a REIT. You set up the following cash flow pro forma for a target property.
	0	1	2	3	4	5
PBTCF*		5.00	5.15	5.30	5.46	121.55
Debt Service**		(2.00)	(2.00)	(2.00)	(2.00)	(52.00)
EBTCF		3.00	3.15	3.30	3.46	69.55
Income Tax		-	-	-	-	-
EATCF		3.00	3.15	3.30	3.46	69.55
* PBTCF includes the reversion value in year 5. ** Debt service includes the principal repayment in year 5.
5-1. The expected total return to the property (i.e., property discount rate) is 8%. What is the property value as of year 0 (i.e., the present discounted value of PBTCF from year 1 to year 5)?
Discount Rate	8%
	0	1	2	3	4	5
Property Value
5-2. What are the expected property values as of years 1, 2, 3, 4, and 5? For example, the year 3 property value is the sum of discounted PBTCF for years 4 and 5.
		1	2	3	4	5
Expected Property Values						$115.93
5-3. Does the property value appreciation rate that you derived in 5-2 seem to be consistent with the PBTCF appreciation rate?
Answer	Yes/No
Additional Comment
5-4. The expected total return to debt (i.e., debt discount rate) is 4%. What is the value of debt as of year 0 (i.e., the present discounted value of debt service from year 1 to year 5)?
Discount Rate	4%
	0	1	2	3	4	5
Debt Value
5-5. What are the expected debt values as of years 1, 2, 3, 4, and 5? For example, the year 3 debt value is the sum of discounted debt service for years 4 and 5.
		1	2	3	4	5
Expected Debt Values						$50.00
5-6. What is the equity value as of year 0? Hint: The sum of debt and equity values has to be equal to the property value at each point in time.
Answer
5-7. What are the leverage ratios for years 0, 1, 2, 3, and 4? The leverage ratio is calculated on the basis of the property and debt values for each year.
	0	1	2	3	4
Leverage Ratio
5-8. What are the expected total equity returns for years 0, 1, 2, 3, and 4? Use WACC version 2. The "year 0 return" will be used as the discount rate between years 0 and 1.
	0	1	2	3	4
Equity Return
5-9. Calculate the discount factor for EATCF for each year. For example, the discount factor for the year-1 EATCF equals 1/(1+equity return for year 0), the discount factor for the year-2 EATCF equals 1/(1+equity return for year 0)/(1+equity return for year 1), and so on.
	0	1	2	3	4	5
Discount Factor		1
5-10. What is the equity value based on the discounted EATCF (i.e., EATCF*Discount_Factor)? Make sure this value equals your answer to question 5-6.
	0	1	2	3	4	5
Equity Value
5-11. What is the (wrong) equity value by discounting EATCF by the property discount rate?
	0	1	2	3	4	5
Equity Value