Graybar Case

HEC PARIS

MASTER OF SCIENCE IN MANAGERIAL AND FINANCIAL ECONOMICS

Academic Year 2012/2013

Real Estate Finance

The Graybar Case

Cavatoni Alessandro Nyström Mikael

Hynes William

MacDonald Allan Spiwak Boris

INTRODUCTION As with the assessment of any investment, it is at first necessary to consider the expected return of the offering and the risks that could cause the return to deviate from the projections in order to provide a recommendation. The valuation section explains in detail the projected cash flows from the point of view of the investors. Also, in order to assess the riskiness of these revenues, the estimate of the IRR of Metropolitan Life Insurance Company’s investment in the Graybar Building is taken as the starting point. However, given that the cash flows to Associates will be exposed to risks exceeding those faced by Metropolitan Life Insurance Company, it will be necessary to earn a return in excess of the aforementioned IRR. The extent to which the expected return should exceed this figure will be examined after discussion of the additional risks. The approach will be as follow:   Projection of the cash flows received by an investor in Associates Estimation of the rate of return that would make this investment’s fair market value equal to the price paid by investors in Associates ($ 10,000)  Evaluation of the additional risks faced by Associates compared to Metropolitan Life Insurance Company  Evaluation of whether the risk-adjusted return is sufficiently high in order to adequately compensate the investors in Associates IRR OF METROPOLITAN LIFE INSURANCE COMPANY’S INVESTMENT The use of Metropolitan Life Insurance Company’s investment as a starting point for assessing the risk of the cash flows is based upon the finding that the ultimate source of the revenues for Metropolitan Life Insurance Company is exactly the same as for Associates: the rents from tenants, as shown in the diagram below.

The IRR is the rate that...