Question

please assist on parts b-e

P14.17 Evaluation of Partnership Opportunities Reitmyer, Simon, and Trybus are partners in a real es tate partnership. The partnership's balance sheet shows: Cash Rental properties, net..... $ 20,000 700,000 Mortgages payable.... Capital, Reitmyer (40%).... Capital, Simon (40%)... Capital, Trybus (20%)... Total liabilities and capital. $300,000 200,000 150,000 70,000 $720,000 Total assets ........ ..... $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 S1,200,000. 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 woulo 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 ive their specified salanes for two years, they could terminate the agreement without any payment due the Ushers.

Answer 1

Solution to Part (b)

The present value of Cashflow to be received by the existing Partners at different times are as follows:

1) Initially for giving up 40%.

Share of Each partner Given Up

	Reitmayor	Simon	Trybus
(a) Existing Share in the Partnership	40%	40%	20%
(b) Reduction in Share	40%	40%	40%
Share Given Up (a)*(b)	16%	16%	8%

Therefore the Total consideration of $50,000 received shall be divided in the Ratio of the Share given up i.e 16:16:8 (2:2:1)

That receivable by the existing partner shall be :

Reitmayor - $50,000 * (2/5) = $20,000

Simon - $50,000 * (2/5) = $20,000

Trybus - $50,000 * (1/5) = $10,000

There shall be no discounting as they are receivable today itself.

2) Recurring Receipt of $40,000 salary for each of the exisitng partner for each of the Ten Years.

Therefore the Present Value of the salary received by each of the Partner

=$40,000 * Cummulative Discounting factor @ 10% for 10Years

=$40,000 * ( 0.909+0.826+0.7513+0.683+0.621+0.564+0.513+0.467+0.424+0.386)

=$40,000 * 6.145

=$2,45,800

3) Terminal Value receivable by each existing Partner at the end of tenth Year for successful adherence to t&c by the Ushers.

=$1,000 * PV Factor for the 10 Year @10%

=$ 1,000 * 0.386

=$ 386.

Therefore the Total Amount receivable by Each partner out of this is as follow:

	Reitmayor	Simon	Trybus
(1) For giving up stake in the Partnership	$    20,000	$    20,000	$    10,000
(2) Salary Receivable	$ 2,45,800	$ 2,45,800	$ 2,45,800
(3) For Giving up the Entire stake	$ 386	$ 386	$ 386
TOTAL RECEIVABLE IN PRESENT VALUE	$ 2,66,186	$ 2,66,186	$ 2,56,186