Question

P14.17 Evaluation of Partnership Opportunities tate partnership. The partnership's balance sheet shows Reitmyer, Simon, and Trybus are partners in a real es- $20,000 700,000 Mortgages payable. Capital, Reitmyer (40% Capital, Simon (40%). Capital, Trybus (20%) $300,000 Cash.. Rental properties, net. 200,000 150,000 70,000 Total liabilities and capital Total assets $720,000 $720,000 The partners are contemplating terminating their business, as they no longer wish to spend the time in- volved in managing the properties. Further, several properties are in need of renovation. They believe that the properties could be sold on a piecemeal basis for a total of $1,200,000. After paying off the mortgage debt, the remaining cash would be distributed to the partners Don and Mary Usher have approached the partnership with a proposal. Don is experienced at prop- erty maintenance and renovation, and Mary is experienced in property management. They are interested in getting into the real estate rental business. Both are currently employed, but they have little capital to invest. They offer $50,000 to be admitted as a 40 percent partner, the three existing partners would con- tinue as partners, but would be relieved of all operating responsibilities. Each year for the next ten years each old partner would receive a "salary" of $40,000 out of partnership earnings, though they would not be expected to render any services. Because they would retain a collective 60 percent ownership, they could block any actions by Don and Mary that they deemed inadvisable. Their interests would be further protected by a security interest in the rental properties, though it would be subordinated to any present and future mortgage debt. At the end of the ten years, their remaining partnership interests would be transferred to the Ushers for $1,000 each The Ushers could accelerate the process at any time by prepaying the future payments, at a 10 percent discount rate. The existing partners could terminate the agreement at any time and buy out the Ushers for a price of $50,000 times the number of years the agreement had been in effect. However, if the existing partners did not receive their specified salaries for two years, they could terminate the agreement without any payment due the Ushers.

Answer 1

mount realised by selling properties $ 2,000,000 - $ 650.000 = $ 1350,000 present Value = $ 1,350, 600 x PVF Clot, syes, = - $1,350.000 X 0.6209 $838,215 in the ratio of 40:40:20 335, 286: 335,286: 167, 643 = pay out to present acher & $ 50.000 x syears = $ 250,000 Value - $ 250,000 x PVF (10%, stears = $ 250,000 o 6209 - $1,55,225 each partner = $ 155, 225/3 - $51,741.67 received by each partat pay out by Amount Reity mes = 126,796 + 335286-51,74167 & 4 10,340.33 Simon = 126,796 + 335, 286 - 51,741.87 $ 410,3403 Toy bus = 126, 196 + 167,643-51,741.66= $242, 1273

Amount received by each partner Reitymer Simon Trybus = 23 140+ 150260 - $ 193,400 = 23140+ 150, 260- $ 173,400 - 23,140+ 15,130 = $98.250 (d) Oshed's exercise prepayment sighte It is clearly given that Oshere could accelerate the process at any time by Pepaying the future payments, at a 10 percent discount sate. which means, each partner will effectively get the same amount if it is in place for 10 years. The answer is same as by ie, a $ 246, 185.50 per each partner le) old partners terminate the contract - at the end of year 5 Present value of Amount sceived - $ 40,000 X PVAF C10% 5400 - $40,000 × 3.1699 = $ 126,796 from by contract each partner

mination Rights Rights invoked at the end of (0) Termination In this & 40.000 and sold case, per the each partats received year for first 2 years. properties at the end of year - 4. Amount received from & LLBOUR & PVF Liot, fais $ 40,000 x PVF (10), 2yed =($ 40,000 x 0.9091) + ($ 40,000 X 6.8264) 2 $ 36,364 + $33056 $ 69420 Each Part not = $69420/3 = $23140 Amount realised by selling properties = - present $ 9,50,000 - $400,000 $ 550,000 6 Value = $ 550,000 X DVF (IUI, LYD = $ 5,58.000 x 0.6830 $ 3,75,650 ratio of 40:40:20 138.260 1.50 260 : 15.30 in the =

capital sharing and toy bus de Ratio of Reitmyer, som 401, 401, 20-1. Despect Amount received by each - Estrictal = Capolala share Sharo partner in Amount no habere Reitmych Simon Trybus - - - $920,000 x 401 4 920,000 X 407 $ 9,20,000 X201 = $3,60 - $3,68000 = $1,34,000 and completely fulfilled b) offer is accepted over 10 year span Present Value of Amount received = by each partno $ 40,000 10 years per year out $ 6000 at the ente = a $40,000 & PVAF (10), logers - $1,000 X PVF Clot, lo year) $ 40,000 X 6-145) + ($1,000 to = - - & 2,45,800 + $385.50 $ 2, 46, 185.50

solution Present Present Value Value Factor - Annuity PVF Factor - PVAF PVF (101, 10 years) = 0.3855 PVAF clot, lo years) = 6.145 PVE (101, 1 year = 0.9091 PVF (101) 2 years = 0.8264 PVF - (16t, 3 years = 0.7513 PVF Clot, 4 years = 0.6830 PVF (10%, 5 years = 0.6209 PVAR (lot, 5 years) - 3.1699 offer not accepted Properties Partnership Liquidated (a) sold and Hore properties are sold today. Therefore discounting is not applicable Assets Cash properties realised $ 20,000 $ 1,200,ooo $1,220,000 less. Mostagages payable $300,000) Amount Available for all partnots $ 9 20,000