Some of the more important principles are cost, full disclosure, revenue recognition, matching, monetary unit, economic entity, going concern, time period, and materiality. Franchise Brand Rights Once a company establishes the value of its brand in the marketplace and proves that its brand can travel, franchising the brand becomes another potential growth strategy. The top form is a twelve-day rooms revenue forecast for the Huntington Hotel for the first twelve days of December. As stated in the explanation for option #1, in order to compute the NPV you must input the cash flows for years 1 through 5. The combination fajita platters, while not even ranked in the top ten items, sold 299 portions, which contributed $5,689.97 to Mexicana’s bottom line and was its second most profitable item. Address any ratios that appear high or low, and explain why you think this is the case. Please explain. Wikibuy Review: A Free Tool That Saves You Time and Money, 15 Creative Ways to Save Money That Actually Work. 5. We discuss these terms more fully later in the chapter. Note that total liabilities have decreased, and total equity has increased by 5.68 percentage points. Concept Check Addition of a Spa at a Resort Hotel Powell Hospitality Ltd. is proposing the redevelopment of the spa at its Whispering Winds Resort. Clearly, Clayton Bank is offering a better option for the Clover Hotel Company. 290 CHAPTER 10 䡲 THE INVESTMENT PACKAGE A prospectus should answer the following questions: • Type of investment • Parties involved • Amount to be invested • Charges and fees • Expected risk and return • Exit strategy • Further contact information A sample table of contents from an IPO prospectus is shown below: 1) Key Dates and General Information 2) The Offering: Investment Highlights i) Purpose of the Operation ii) Number and Origin of Shares iii) Valuation of the Company iv) Terms and Conditions of the Offering v) Cost and Net Proceeds of the Offering 3) Industry Overview 4) Overview of Company i) General Information ii) Competition and Market Analyses iii) Board of Directors iv) Senior Management 5) Financial Information i) Risk Factors ii) Independent Accountants Report iii) Consolidated Financial Statements iv) Pro Forma Financial Statements v) Recent Developments and Prospects vi) Dividend Policy 6) Additional Information 7) Glossary of Terms and References 8) Corporate Directory I L L U S T R AT I O N 1 0 - 1 Prospectus: What Should Be Included 5. A. Divina Developers put together an investment proposal for Fergus and Freya requesting to use their concept and cash equity for the deal. The first step in determining the optimum debt and equity mix is to calculate the maximum amount of money you can borrow based on the interest rate and amortization rate your lender is proposing and his required debt service coverage ratio (cash flow before debt service divided by debt service). It also limits their ability to participate in the management of the business. Unit 2 Finance in Hospitality Industry Assignment Sample Introduction The first part of this assignment focuses on the importance of various sources of finance and the impact they have on the organization as a whole. The 302-room Blackstone Hotel is a recently defranchised upscale NEGOTIATING SKILLS 343 hotel asset that has been lender-owned for several years and fallen on hard times. An equity investor’s strategy, particularly an equity fund, is ■ often to invest the equity, make a quick killing, and look for another opportunity to do it again. While they realize that many markets have already MANAGING WORKING CAPITAL AND CONTROLLING CASH 105 been saturated by major brands in the United States, they believe Juancas coffees have a better appeal because Colombia is known for producing high-quality coffee products. b. NPV is equal to or greater than zero. As a hospitality manager, your job is to control cash. As a result, the entire savings and loan industry collapsed. With this in mind, it’s clear that the more cash flow an asset is generating at the end of five years, the more an investor would pay to acquire it at that time. Food, beverage, and other gross profit declined during the period. S O U R C E S KFC. Preview the contents of each chapter. 2. The two loan provisions that should be negotiated the hardest are the amount of the loan and the amortization rate. F E A T U R E S T O R Y KEMMONS WILSON Kemmons Wilson was Memphis’ most famous entrepreneur. ‘‘What is it that you are not comfortable with about the deal?’’ Here is the hard part—say nothing until he speaks. It worked! Now that you understand the math, the calculation of net present value should be easy. Apply financial analysis skills to scheduling, pricing, revenue management, profit flexing, and costvolume-profit decisions. B THE NEED FOR CAPITAL 139 Capital Capital is money, or the equivalent of money, that is loaned to, or invested in, a business. Toward the end of this chapter, there is a list of key terms in alphabetical order, and you will see such lists in the remaining eleven chapters of the book. Define internal rate of return, and explain how lenders and investors make investment decisions using this financial analysis tool. (2006, January 30). QUESTIONS 1. How did this occur? The crisis was a result of the thousands of real estate projects that went bankrupt because they were not economically feasible in the first place. QUESTIONS 1. As its name indicates, all shareholders of a limited liability company enjoy limited liability. Which one should Jorge choose? Because the factory default for most calculators is set at twelve compounding periods per year, you need to set your calculator for annual calculations. Following his costly mistake, Sternlicht left JMB and struck out on his own. 163 The investment banking firm earned the difference between the interest rate paid by the borrower and the interest rate paid to the owners of the CMBSs. In March 2002, Tricon acquired Long John Silver’s, A&W, and their parent company, Yorkshire Global Restaurants, and renamed the company Yum! Therefore, the investment analysis component of your package is vital and should not be taken for granted. Third-party Confirmation An important component of an investment package is an affirmation from a well-known third party accounting or consulting firm that the proposed investment is feasible. W H E R E W E A R E G O I N G , W H E R E W E H AV E B E E N : A bulleted list of the key concepts related to each of the learning outcomes presented at the beginning of each chapter appears within the end-of-chapter material. If you need to pay bills, make sure you have sufficient funds in your account. The time period principle states that the company must set specific time periods for measuring its financial results. E Q U I T Y: Amount of capital invested in the business plus retained earnings. Because the structure is historic, the Williams Bennett Hotel Development Co. has been in discussions with the city government to determine if there are any public incentives for redeveloping this property. They serve as partners with the federal government and private lenders to provide financing opportunities. In danger of losing the property, Kimpton began making cold calls to corporate customers, pitching the hotel’s low rates. To recap the entire calculation, type the following, then hit the enter key: =fv(0.12,5,600,,1) I L L U S T R AT I O N 7 - 1 0 Future Value of an Annuity Due Calculation Using the Business Calculator and Spreadsheet Methods 201 202 CHAPTER 7 䡲 THE TIME VALUE OF MONEY To calculate the present value of an annuity due (PVAD), written in long form: PVAD 5 = $600 + $600 + $600 + $600 + $600 (1 + .12)1 (1 + .12)2 (1 + .12)3 (1 + .12)4 = 600 + 535.71 + 480 + 428.57 + 382.17 = $2,424.45 At the same time, this can be done via a formula: PVAD n = PMT ⫻ [1– {1/(1 + r)n }] ⫻ (1 + r) r Where PMT = payment or the annuity amount. ■ The loan-to-value ratio (LTV) is another important metric for lenders. The more you can borrow for any project, the less equity you will need. QUESTIONS 1. W I N D O W D R E S S I N G : Financial tricks used by financial managers to make a financial statement look better and more profitable than it should. This means, on the average, the inflation rate for the last forty-nine years has been 4.09%. Sometimes lenders count the value of these concessions as equity for loan purposes. Key Terms Produce financial statements that accurately present the financial condition of the company and its operating results over time. M AT E R I A L I T Y P R I N C I P L E : States that if something is material enough, it must have its own account. Learning Outcomes 1. Savings are always just a phone call away! N E G O T I AT I N G E Q U I T Y I N V E S T M E N T a. What would be the chances of this loan being approved? The servicing agent made a fee for monitoring the loan. Again, useful decisions can then be made with meaningful analysis. The originator made a fee for identifying the borrower. This equates to approximately $20,000 per room. This skill will be invaluable to you in preparing operating budgets, profit flexing, and computer modeling of alternative business strategies. Simply looking at the numbers, annual debt service payments would be less for Clayton Bank than for Sherman Bank. L E A S E : A means to acquire physical facilities and equipment and requires a fixed or variable monthly payment, which is equivalent to debt service. How many room-nights does the Jensen’s Lodge need to sell per month to at least break even? The best way to determine how much working capital your business needs is to develop a ninety-day rolling cash forecast. The resulting dollar amount represents the amount of equity you need to raise. The current tax rate is 30%. INTRODUCTION Hospitality Financial Management provides a straightforward, practical approach to help the hospitality manager effectively analyze hospitality industry management reports and financial statements; prepare accurate business forecasts, strategic pricing models, and effective cost control systems; manage working capital; develop and finance growth strategies; perform … 6. 20. If the bearer withdraws the funds before the maturity date, a penalty is normally assessed. If you found yourself walking along a country road and saw a fencepost with a turtle sitting on top of it, you may not know how that turtle got there but you know he didn’t get there by himself. Ms. Brown was able to secure a loan for $1,540,000, and an equity investor agreed to invest the remaining $660,000 in exchange for 20% ownership in the project. . As Mr. Bollenbach recalls, hotel development at the time was at its peak: ‘‘At one point we were opening one Marriott hotel a week.’’ This was the first of his two tenures at Marriott, and it lasted five years. The objective is to calculate the deal’s upside potential and downside risk and see if it still meets the investor’s hurdle rate using more conservative projection assumptions. In 1992, when Landry moved to Manor Care Co., a healthcare company that also owned Choice Hotels International, Warczak followed him and assumed the role of vice president of finance. 9. The planned renovations and reflagging the investment should result in a total project cost of $11,535,000. The difference between the selling price for each week and the cost represents the profit for the timeshare developer. To qualify as a REIT and gain the favorable tax benefits offered by the REIT structure, an entity must comply with the following Internal Revenue Code provisions: ■ It must be structured as a corporation or business trust. Most lenders and equity investors will read your investment package and listen to your story if your deal is a good one. This is what he said: 1. What would you do if you were Esther? In 1993, Paul was living in Scottsdale, Arizona, and dismayed that he could not find a local restaurant that offered Asian food to his liking. CASH MANAGEMENT a. C H A P T E R 7 THE TIME VALUE OF MONEY F E A T U R E S T O R Y RAY KROC: HOW MUCH GOLD ARE ARCHES WORTH? What is the monthly debt service payment on Marco’s loan if Enrique lends him $15,000 for four years at 8% interest? When it comes to raising large quantities of capital, corporations also have an edge over sole proprietorships and partnerships. Preview of Chapter 7 Time Value of Money 1. Shareholder value for a public company is the current market price of its common stock multiplied by the number of shares of common stock outstanding. To recap, for the entire calculation, type the following, then hit the enter key: =pv(0.12,5,600) I L L U S T R AT I O N 7 - 8 Present Value of an Annuity Calculation Using the Calculator and Spreadsheet Methods PRESENT VALUE OF AN ANNUITY DUE In financial management, present value is used to evaluate investment opportunities. ➤ Depending on your particular capital need, a variety of loans is available, including business, construction, mini-perm, permanent, mezzanine, convertible, SBA7(a), CDC (504) program, and leases. How much do you think those original 100 shares of stock will be worth in another fifty years? S W E E P A C C O U N T S : Accounts where banks automatically invest surplus cash balances in secure overnight accounts. ■ Maximized your ROI and IRR. In this example, because the formula is, ‘‘ ⫽ ⫺ initial investment,’’ you need to type in $800 rather than ⫺$800. ■ Besides the money provided by equity investors, where is capital to finance the project coming from? To complement its upscale Chinese full-service restaurant concept, P.F. The 344 CHAPTER 11 䡲 CRAFTING AND NEGOTIATING THE DEAL particular area where the restaurant is being built comprises residents with diverse cultural backgrounds. So, before you shop for a brand-new car, consider a used vehicle and perhaps one that is more a middle-of-the-road model. LEARNING OUTCOMES: PREVIEW OF CHAPTER: A Chapter Preview outlines the main topics and subtopics within each chapter. The present value is $100, the future value is $110, the compounding period is one year, and the interest rate is 10.0%. S I N G L E S U M ( L U M P S U M ) : A time value of money concept where only a single sum of money is involved in the calculation. The primary advantage of the payback period method is that it is easy to calculate and understand. Leven suggested Microtel, a new budget hotel brand. With his management team, Juan Carlos has determined cash inflows and outflows for the first ninety days of business: ■ The test location will open in September to coincide with cooler weather and the hope that more people will be inclined to purchase hot coffee. A federal government agency named the Resolution Trust Corporation (RTC) HOTEL FINANCING TRENDS AND SCHEMES 161 was formed for this purpose. PRESENT VALUE OF AN UNEVEN CASH FLOW Illustration 7-13 presents an uneven stream of cash flow a hospitality manager has projected for his business over a five-year period. ■ NPV is equal to or greater than zero. The risks she has taken to date have paid off handsomely to the point where she now has both the time and the money for her philanthropic efforts, which she loves. Mr. Stan Domla is the general manager of the Canyon Hotel, and one of his responsibilities is to review the daily payroll report created by the department heads at the property. ■ Lending is all about risk, so don’t ignore it. Line graphs and bar charts are often used to graphically show the results of the analysis. ‘‘Conrad N. Hilton, 1996 Hall of Honor Inductee of the Hospitality Industry Hall of Honor.’’ http: / / / home.asp?PageID⫽183. There are, of course, several downsides to being a sole proprietor. ‘‘Global Update: Hilton Delivers on Promus.’’ http: / / / archives / 1999 / 10 / gu-hilton-promusBollenbach.asp, October 1999. Lockbox processing allows a business to collect and process payments quickly. 1. The Microsoft Excel formula to calculate NPV is ‘‘⫽ ⫺ initial investment ⫹NPV (rate, values),’’ where rate is the weighted average cost of capital (WACC) and the values are the cash flows in the correct time sequence, not including the initial investment. It will likely come back to haunt you. A&W Restaurants, Inc. ‘‘The First Frosty Mug.’’ http: / / / about / default.htm (accessed January 22, 2006). After working in the industry for several years, I knew that I needed a change. Yet, within a year, he pulled himself out of the insolvency mess by refinancing $475 million of debt at a lower cost and selling his Paramount and Clift hotels for close to $200 million. PMT? Steps in Excel Note: Type only the symbols or letters within the bracket [ ] and not the bracket itself. While the traditional career path for a property-level controller is to become a regional controller and then perhaps take a corporate-level position, some controllers become hotel general managers and, later, members of the corporate management team. Use proven selling skills: State the benefits of your venture, address any objections raised, and close the deal. The standard unallocated expense categories are administrative and general, marketing, property operations and maintenance, and utilities. Learning Outcomes 1. For the purposes of our discussion, we use this definition. When analyzing the two totals, $20,000 for purchase of the software and $20,448 for the ASP program, the required investments are very close. Calculate the return on investment in Year 1 for each limited partnership unit if the restaurant earns a net operating income of $425,000. What is a third-party confirmation, and why is it important in an investment package? While he was preparing for the loan negotiation, a friend told Christian that if he senses anything negative from the lender, the lender is just bluffing and Christian should tell the lender that the pro forma numbers are strictly the worst-case scenario and that he will go back and rework them for further discussion. CONCEPT CHECKS: This section summarizes what has been covered in a particular chapter and what will be covered going forward in the text. Is the project team really qualified? The lender is getting greedy, or The loan-to-value ratio is too high and the lender is looking for more security, or The lender is not totally comfortable with your deal. MAXIMUM AMOUNT OF DEBT While your lender’s LTV, LTC, and DSC ratios will limit the amount you can borrow, an important question to ask yourself is, ‘‘How much can I borrow based on how much cash flow I am comfortable in committing to debt service?’’ Once you answer this question and know the interest rate and amortization rate your lender is prepared to offer you, you can calculate the maximum amount of money you will be able to borrow. The JC Hilton Head, SC Date Prepared: 7/15/2006 PURCHASE SUMMARY Purchase Price $ 13,500,000 Number of Rooms Price per Room Room Revenue Multiplier Total Revenue Multiplier Going-in Cap Rate on Trailing-12 as of 2005 Current Value of the Property 296 $45,700 3.1x 2.3x 2.1% $18,180,000 SOURCES and USES SUMMARY Total Uses / Acquisition Costs Cost per Room $50,085 Purchase Price Third-party Inspection Reports Financing Costs Legal Costs Closing Costs Operating Funds Franchise Application Fees Mortgage Brokerage Fees Brokerage/Advisory Fees Equity Placement Fees PIP Costs / Renovation Costs $13,500,000 25,000 120,500 65,000 100,000 300,000 $118,400 $96,400 $0 $0 $500,000 Total Sources 65.0% 35.0% $ 14,825,300 Mortgage Loan Amount Equity Required 100.0% Equity Partners $9,636,400 $5,188,900 $5,188,900 I L L U S T R AT I O N 1 0 - 5 Sample Sources and Uses Statement THE NEED FOR AN INVESTMENT PACKAGE 297 Photographs or Renderings Because lenders and equity investors receive hundreds of investment packages each year, making your package stand out from the others is a challenge. The opportunity to leverage the brand name of one component with the other components of the project to generate additional demand and command premium pricing. The NPV method is superior to the payback method in that it takes into account all cash flows, not just those that occur before the set time criterion. He expects business to pick up a bit in the second year, really take off in Year 3, and then stabilize and earn around $300 annually thereafter. Real estate mortgage investment conduit b. Illustration 6-6 shows a loan of $100,000 with an annual interest of 10% paid over a three-year period and over a five-year period. You may never know what you might have missed in terms of interest rates. Investment banks are companies that work with businesses to raise both debt and equity capital. One approach is to calculate the present value of each year’s cash flow individually and add them together, as shown in Option 1. In this case, the construction loan is said to roll into the permanent loan when the project is completed. If you can win on the amount of the loan and the amortization rate, you can afford to pay a slightly higher interest rate and maybe even a point or two up front as long as your debt service payment is in line with your projections. To be in compliance, all merchants and service providers must follow the Payment Card Industry Data Security Standard (PCIDSS). If you present yourself well and look and speak like a seasoned professional, you might just be accepted as one even though you may lack the depth of knowledge and experience of the person with whom you are negotiating. 4. Identify the types of debt and equity and their sources. 10. . 10. It took several years to renovate and turn the hotel around, but now that the challenge has been met, management is looking to the future and additional earnings potential. There are, however, regional investment banking firms that work on smaller capital transactions. U N E V E N S T R E A M O F C A S H F L O W : A stream of cash flow where the payments are not the same in all compounding periods. 2. SOURCES OF EQUITY a. 6. Customers lured to a competitor are difficult to get back. FORECAST: as of 11/30/08 City: Los Angeles Property: Huntington - Airport # Rooms: 86 Division: Rooms 12-Day Forecast Report Avail Rooms Forecast # Forecast Occ.% Net Rooms Revenues Average Rate REVPAR ACTUAL: as of 12/13/08 City: Property: # Rooms: Division: 12/1/08 86 55 63.95% 6215 $ 113.00 $ $ 72.27 $ Huntington Los Angeles Airport 12/2/08 86 53 61.63% 5313 100.25 $ 61.78 $ Los Angeles Huntington - Airport 86 Rooms 12/3/08 12/4/08 86 86 26 25 30.23% 29.07% 2653 2724 102.04 $ 108.96 $ 30.85 $ 31.64 $ 12/5/08 12/6/08 12/7/08 12/8/08 12/9/08 12/10/008 12/11/08 12/12/08 86 86 86 86 86 86 86 86 36 48 46 53 53 65 23 23 41.86% 55.81% 53.49% 61.63% 61.63% 75.58% 26.74% 26.74% 4050 5272 4741 5313 5157 6153 2300 2473 112.50 $ 109.83 $ 103.07 $ 100.25 $ 97.30 $ 94.66 $ 100.00 $ 107.52 47.09 $ 61.30 $ 55.13 $ 61.78 $ 59.97 $ 71.55 $ 26.74 $ 28.76 Huntington Los Angeles Airport 12-Day Forecast Report Avail Rooms Forecast # Forecast Occ.% Forecast Net Rms Rev Forecast Average rate 12/1/08 86 55 63.95% 6215 $ 113.00 $ 12/2/08 86 53 61.63% 5313 100.25 $ 12/3/08 12/4/08 86 86 26 25 30.23% 29.07% 2653 2724 102.04 $ 108.96 $ 12/5/08 12/6/08 12/7/08 12/8/08 12/9/08 12/10/008 12/11/08 12/12/08 86 86 86 86 86 86 86 86 36 48 46 53 53 65 23 23 41.86% 55.81% 53.49% 61.63% 61.63% 75.58% 26.74% 26.74% 4050 5272 4741 5313 5157 6153 2300 2473 112.50 $ 109.83 $ 103.07 $ 100.25 $ 97.30 $ 94.66 $ 100.00 $ 107.52 Actual Occ Rooms Actual Occ Rate Actual Net Rms Rev Actual Average Rate REVPAR 59 68.60% 6799 $ 115.24 $ $ 79.06 $ 51 59.30% 5218 102.31 $ 60.67 $ 25 23 29.07% 26.74% 2533 2624 101.32 $ 114.09 $ 29.45 $ 30.51 $ 34 46 43 51 58 63 22 25 39.53% 53.49% 50.00% 59.30% 67.44% 73.26% 25.58% 29.07% 3738 5064 5088 5230 5757 5806 2253 2749 109.94 $ 110.09 $ 118.33 $ 102.55 $ 99.26 $ 92.16 $ 102.41 $ 109.96 43.47 $ 58.88 $ 59.16 $ 60.81 $ 66.94 $ 67.51 $ 26.20 $ 31.97 I L L U S T R AT I O N 2 - 7 Rooms Revenues Forecast for Huntington Los Angeles Airport FINANCIAL REPORTING Food Menu Restaurant: Mexicana Cantina Menu Item Name Bean, Cheese, and Jalapeño Nachos Beef, Bean, Cheese, and Jalapeño Nachos Chicken Fajita, Bean, Cheese, and Jalapeño Nachos Beef Fajita, Bean, Cheese, and Jalapeño Nachos Cheese Quesadillas Chicken Fajita Quesadillas Beef Fajita Quesadillas Shrimp and Scallop Quesadillas Shrimp Quesadillas Spinach Quesadillas Mixed Vegetable Quesadillas Mixed Vegetable Queso Flameado Chorizo Queso Flameado Chicken Fajita Queso Flameado Beef Fajita Queso Flameado Shrimp Queso Flameado Chili con Queso with Jalapeños Chili con Queso with Ground Beef and Jalapeños Chili con Queso with Chorizo and Jalapeños Christina's Queso Black Bean Soup Yucatan Tortilla Soup Caldo de Pollo Taco Salad with Ground Beef Taco Salad with Chicken Fajita Taco Salad with Beef Fajita Chicken Salad Chicken Fajita Platter 1/2 lb. 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