Hdc Spreadsheet

Situation: HDC’s decision to buy the Lexington Club is appositive NPV transaction. However, the potential buyer TSI disagrees.

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

• Use pre-tax cash flows.
• Assume the revenues of the Lexington Club grow by 5% per year.
• Assume that the appropriate discount rate for real estate cash flows was 10%.
• Assume a 20 year life of the facility.
• Assume no residual value of the facility after 20 years.

(Hint: In calculating the NPV of the decision to buy the real estate, you only need to consider the incremental cash flows resulting from the decision).  This is a plain vanilla NPV question; just compare the cost of the project to the cash flows saved.

2.            TSI values HDC as (5 x EBITDA – debt).  Exhibit 3 of the case shows TSI’s valuation of HDC, using EBITDA projected for year 2000, both with ownership of the property and leasing of the property.  Explain, in just a few bullet points, the $1.875 million difference in valuations (don’t put any tables in your answer).

HDC decides to restructure the ownership of the Lexington club to get around the real estate problem that TSI’s valuation method creates.  The deal is as follows:

•             A holding company, named ABC, is created to own the Lexington Club and lease it back to HDC.  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.