Calculate the WACC for each of the financing options provided above.

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Overview In January, the city council for San Marcos, Texas announced the building of a new public-private activity center. Largely modeled after the Cedar Park Events Center, the project will consist of a 7,000 seat multi-purpose event center on city-owned property on the northern outskirts of San Marcos city limits. The projected cost of the new facility is $72 million. It will be home to affordably priced entertainment (concerts, live entertainment), The San Marcos Toros (formerly the Austin Toros) NBADL basketball team, shopping, and restaurants. Citizens and visitors will be able to eat, shop, work and play in one compact neighborhood. The city and a private ownership group Jordan Sports, Ltd. (JSL) are close to reaching a ten-year agreement which calls for a capital investment by both parties, revenue sharing on all events, and sharing of capital repair and improvement. Components The San Marcos Event Center Complex will include two inter-related components: The Center: 185,000 square foot multi-purpose indoor event center with 6,800 seats, 24 luxury suites, a center-hung scoreboard, banquet space, concessions, a state of the art parquet floor for premier basketball events, and 3,000 parking spaces immediately adjacent to the building. The Surrounding area: An approximately 18-acre mixed-use development with approximately 98,000 square feet of retail (shops, restaurants) and approximately 85,000 square feet of commercial (office space). Together, the event center and mixed-use development will create a pedestrian-friendly entertainment destination in the reaches of San Marcos, New Braunfels, Austin, and surrounding Central Texas Communities. Socio-Political Issues The project, while well-intentioned, has been met with some resistance from the city and a vocal group of taxpayers. There are two main reasons for the resistance. First, the city has been hit extremely hard with the recent economic recession. In the past three years, they have cut school funding, police funding, and street maintenance funding by over 25%. These were significant cuts for which the effects are just now being felt strongly. The second reason is that the facility is being built on a site that was originally slated for a public-private venture for affordable housing. There is an overwhelming need for such housing in San Marcos, where 40% of the city residents live at or below the median income level for the state of Texas. The public-private venture for the housing development had stalled when the city failed to meet its side of the financing. Thus, many residents feel that if the city does not have money for a housing development, it shouldn’t have money for a multi-events center. However, other residents argue that the housing development only costs money, but the events center will make money for the city. Sales, Operating Costs, and Financing Options The city has formed a capital revenue and budgeting task force to provide guidance on the project. This task force has created a sales and operating costs projection and three financing options for the new facility. Sales are expected to be $15 million in year one, with 15% growth in year two, and 10% growth each year for years 3, 4 & 5, then 5% growth each year for years 6-10. Operating costs (not including loan repayments) are expected to be 50% of sales. The tax rate for the venture is 25%. Financing Options Option 1 Option 1 utilizes 100% debt. The JSL group would take out a private loan in the amount of $35 million (or 48% of the total cost) at 6% interest. The city would back the remaining $37 million (that is, 52% of the total cost) by issuing bonds at 3.75% interest. This would be partially backed by general obligation bonds from San Marcos residents (which still requires voter approval), and partially with revenue from the facility itself. The annual debt payment on this form of financing (interest + principal) is $5,314,176.00. Option2 OPTION 2 utilizes 60% city-backed debt at 4.25% interest. This would be paid back through a visitor tax increase on hotels and rental cars, as well as revenue from the facility itself. This tax increase does not require voter approval. The remaining 40% would be offered to preferred limited stockholders. This preferred stock would be offered at $45/share. The dividend expected would be $5 per share and the flotation cost is an inexpensive $1.50 per share. The annual debt payment on this form of financing (interest + principal) is $3,180, 526.00. Option 3 Option 3 utilizes a mix of private loans and public ownership of the facility. In this option, JSL owns 25% of the facility through a limited private stock offering to its internal partners. This would be offered at $43/share, with a $3 dividend and $2 flotation cost. Then, JSL finances an additional 30% through private bank loans (so that its total controlling share is 55%). These loans are issued at 6%. The final 45% of the facility will be offered as common stock to the residents of San Marcos, then surrounding communities. This stock will sell for $20/share with a $2 dividend, $2 flotation cost, and 1.5% growth rate. The annual debt payment on this form of financing (interest + principal) is $2,275,482.00. Your Task After this initial leg-work, the task force has hired you as a consultant to help them make their final analysis and recommendations on the project. Your job is to utilize the revenue and cost to calculate the cash flows from the facility, calculate the WACC of the three project options, and then compute the returns (using NPV and IRR) of the three options. After a full analysis of the cash flows and the returns, you are to prepare a recommendation to the city and JSL concerning the best course of action for financing the new facility, from both political and financial perspectives. Note: you do not need to analyze whether or not the project is feasible, but only the best financing option given the projected cash flows from the project. Use the cash flows table and Time Value of Money Table D to calculate the IRR for the project over a 10 year time period.

3. Calculate the WACC for each of the financing options provided above.

4. Use the Time Value of Money Table B to calculate the NPV for each of the financing options. Use the WACC for each option as the discount rate for that option.

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5. List 3 strengths and 3 weaknesses of each financing option—be sure to consider your ability to make your debt payments on top of existing operational costs (i.e., after you have your final cash flows for each year—could you make the debt payment for each option?).

6. Provide an overall recommendation to the city based on your analysis. Your recommendation should include both financial and socio-political considerations. Figure 1: Cash Flows Template Sales -Op expenses -Deprec = EBIT -taxes =Net Income + Deprec =Cash Flow

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