Case study


Prof. Ian Giddy, New York University

Spacemasters is the largest independent owner-operator of large-scale automated self-storage complexes in the greater Manchester area. The company opened its first self-storage complex in the City of Manchester in 1987 and now has facilities throughout downtown Manchester and nearby counties.

Selwyn James, the CEO of Spacemasters, is considering options for a change in the company's financial structure. He is in discussions with two banks about borrowing additional funds based on the security of the real estate and the company's cash flow. Since the company now has good stable prospects, he is considering paying a substantial one-shot dividend to himself and fellow shareholders.

The book value of the company's assets is £24 million. He has had a professional estimate of the replacement value, and it was £28 million. While his company is private, other companies in the industry are valued at 2x book or more. Selwyn has discussed his eventual goal of going public. First though, he plans additional expansion through acquisitions and construction of new storage units.

He has asked your advice, and provided the following information.

Currently the company has debt of £19m
Management estimates EBIT this year at £6.1m, and EBITDA at £8.3m

Based on this business, the banks' minimum EBIT interest coverage ratio is 2.7
Currently UK gilts pay 4.50%
Estimated beta from comparables is 1.7
The UK stock market "risk premium" is estimated at 5.50%
The estimated value of the physical assets is £28m
The future growth rate is about 4.00% per annum

The firm's marginal tax rate is 30%


1. How much leverage does the company have now?
2. How much additional debt can the company afford to take on?
3. What is the best use for funds raised with additional debt? | | | | contact
Copyright ©2005 Ian Giddy. All rights reserved.