He currently has $200,000 of his own money available to invest in the project; therefore, he needs to raise only an additional $210,000. The display now shows the principal of $30,311.4804. The W Las Vegas Hotel, Casino, and Residences is a mixed-use project and receives its predevelopment credit facility of over $230 million through a syndicate of banks led by the Socie´te´ Generale Corporate and Investment Banking with first-lien and second-lien term loans. She is looking into selling the restaurant and would like your opinion on how she should prepare the restaurant’s financial statements. NEGOTIATING LOANS WITH LENDERS 325 ‘‘Special Report: Yum! So what are his accounting and finance tips to aspiring hospitality managers and entrepreneurs? His financial partners in the deal were Outback Steakhouse, Inc., and a private equity investor. For example, the BAII Plus calculator comes with a factory setting for two decimal places. Illustration 9-7 shows that if the hurdle rate is 15%, NPV is negative, but a 13% hurdle rate makes NPV positive. Utilizing this information and the sales figures, we can determine that the Total Cost of Sales is $717,200 ($2,200,000 ⫻ 32.6%). 342 CHAPTER 11 䡲 CRAFTING AND NEGOTIATING THE DEAL Concept Check Expanding Gregory's Fergus and Freya Eneas have owned Gregory’s Greek Restaurant for over thirty years in Gregorytown, a small scenic town in the country. 4. Substitute checks are special paper copies of the front and back of the original check. Calculate the interest amount: $100,000 ⫻ 10% ⫽ $10,000 2. Enter the following: 600 [PMT] 5 [N] 12 [I/Y] [CPT] [FV] Display will show FV = –3,811.7084* 3. While the sample size Smith Travel Research uses for its actual Host Report is much larger than the sample of seven properties containing 7,326 rooms shown in Illustration 3-7, the format of this sample report is the same as the actual Host Report. This hotel is conveniently located near a major metropolitan area, with easy access from several major highways. Illustration 4-3 presents a cash budget for the Sienna Resort, a hotel property. L I Q U I D I T Y R AT I O S . Again, because money grows, the interest factors for future values will always be greater than 1.0. Any changes to the assumptions will change the project’s PV, NPV, and IRR—and, as a result, the return on the equity investment. Evaluate the software purchase versus the ASP model and determine which is right for the Brownell Country Club. Types of Loans Depending on your capital need, a wide variety of loan types is available to your company, including business, construction, mini-perm, permanent, mezzanine, convertible, SBA, CDC (504) program, and even leases. It has been said that 96% of all Americans have eaten at a McDonald’s restaurant on at least one occasion. PRIVATE CREDIT COMPANIES Private credit companies specialize in mini-perm, permanent, mezzanine, and convertible loans. The child of a Norwegian immigrant father and a German-American mother, Conrad Hilton had a strong belief in the American dream. Most businesses start small as a sole proprietorship or partnership. Now His Goal is to Pay It Forward.’’ Hotels’ Investment Outlook. In both scenarios, Clover Hotel Company will provide the additional $2 million required to fund the deal. Depending on the owner’s ﬁnancial needs, there may be an opportunity to persuade him to become a partner in the business instead of having to use valuable capital to buy his land or building. Bill focused the company’s attention on the growth of hotels and originated the concept of brands within a brand, now known as market segmentation. Using a three-year loan as an example, here are the steps involved: YEAR 1 1. The display will now show the smaller letters BGN on top of the value 0.0000 3. With the display showing P1, this means the calculator is looking at the beginning of period 1, in this case, Year 1. What may be some of the consequences? He is asking for an equity investment of $125,000 and promises to pay Bernard the following cash flow: Year Cash Flow 1 25,000 2 30,000 3 35,000 4 40,000 5 20,000 Bernard’s hurdle rate is 14%. $ PAR $ POR REVENUES Rooms Food Beverage Telephone Other Operated Dept. Type the open bracket [(]. 5. Other uniform systems are available to the hospitality industry, including systems for timeshare entities, condominium developments, health, racquet, and sports clubs, and spas. Owners, lenders, and equity investors all want to feel conﬁdent your team can deliver the proposed project on time, on budget, and generating the operating results projected. We discuss these keys further in a moment. The business calculator b. Using his investment analysis skills, he presented his deal to potential equity investors, raised $7.5 million, and put his $500,000 life savings into the deal as well. The better you become at analyzing income statements and balance sheets, the better business decisions you will make. However, if you establish a favorable track record of success, securing a loan to open your second and third restaurant is normally easier. This distinction contributed to the restaurant’s bottom line, as alcoholic beverages have higher profit 306 CHAPTER 10 䡲 THE INVESTMENT PACKAGE margins than food offerings. ‘‘The hotel and hospitality industry has long been associated with long hours. Marriott also diversified into related products such as vacation ownership and corporate housing by acquiring ExecuStay and expanding its vacation ownership portfolio. Will McDonald’s ever explore other ventures? The following are a few ideas to help you negotiate a favorable ownership position for yourself: 1. Milton Hotels, Inc. (“Milton”) intends to take advantage of this unfavorable environment by acquiring distressed upscale and midscale limited-service hotels properties on a national basis, and through its rehabilitative and operational expertise reposition each asset thereby enhancing value (the “Venture”). Here is how this type of ﬁnancial window dressing works: 1. Calculation: I/Y = 8 PMT = 6,000 N=5 CPT PV = 23,956,26 Because there is a required initial payment of $2,000, the total cost of the lease is $25,956.26, which is $956.26 more than the purchase price. On the debt and equity side, the corresponding $142 million increase is a result of a decrease in current liabilities of $150 million, a decrease in long-term liabilities of $299 million, and an increase in owner’s equity of $441 million. PV perpetuity ⫽ PMT , where r PMT ⫽ annuity payment r ⫽ interest rate You don’t necessarily need to use a business calculator or Excel to calculate the value of a perpetuity. Partners can also add experience, knowledge, and expertise to the business. What is the cost of debt for Sarah? Interior designer c. Contractor 8. 5. How much will my annual debt service payment be? Calculate the maximum amount of money you can borrow based on the lender’s debt to cost ratio and debt service coverage ratio: • 60% ⫻ $30,000,000 = $18,000,000, which represents the maximum amount of the loan 2. CHAPTER 12 䡲 TYING IT ALL TOGETHER Do your homework on the person you are meeting with and be prepared to answer any question you think he or she might ask. Perhaps because of these circumstances, the man has built an aura of invincibility that impels investors and lenders to plunge their money into his projects. , 7. The present value of an annuity can be calculated using the PV, N, I/Y, and PMT keys on a business calculator. Much of the information required to make these decisions is provided by the company’s accounting, management information, and investment analysis systems, which utilize many of the concepts, techniques, and skills presented in this text. Input the number of years of the lease (N). INVESTMENT ANALYSIS 233 |----------|----------|----------|----------|----------| 0 1 2 3 4 5 Years (800) 50 100 300 305 320 I/Y at 10% Steps in Excel Note: Type only the symbols or letters within the bracket [ ] and not the bracket itself. locals won’t walk through a hotel lobby unless they absolutely have to, so having the restaurant next door gives you the best of both worlds. Clark has an investment proposal that invites him to invest $1,000 a year for ten years in a hotel and promises to pay him a return of 11% per year. Therefore, an asset’s market value is 358 CHAPTER 12 䡲 TYING IT ALL TOGETHER deemed to be the present value of the sum of the future cash ﬂow it is likely to generate over its life, factoring in: ■ The amount of annual cash flow projected ■ When the cash flow will be received ■ The risk associated with the generation of the cash flow ■ The WACC required to finance the project Understanding what a discount rate is, being able to calculate the WACC, and being able to estimate market value using the capitalization method of valuation are essential to your being able to understand and use net present value (NPV) and internal rate of return (IRR) to analyze real-world business investment opportunities. Bankruptcy occurs when your liabilities exceed your assets and you are unable to meet your current ﬁnancial obligations. This is true because, in the short term, the number of shares of stock available for the public to purchase is ﬁxed. Interview by Cathleen Baird, May 13, 1994. Land c. Leases 137 138 CHAPTER 6 䡲 FINANCING GROWTH d. Existing buildings e. Government subsidies 6. N O N - R E C O U R S E L O A N : A loan that limits the lender’s repayment options to the assets of the business and the collateral at risk, as opposed to a recourse loan, which allows the lender to also seek repayment from the borrower’s personal assets. Unless you are aware of how this principle works, you could signiﬁcantly underestimate the true value of the company. Because there is only one negative cash ﬂow and it is in year zero, no calculation is needed. For Jackson, however, financing was relatively easy. Prior to meeting Kimpton, he worked for Amfac Hotels as its senior vice president of administration. Let us explain: If you are analyzing independent projects such as buying a new property management system or upgrading your guest rooms, where the acceptance or rejection decision of one project does not affect the acceptance or rejection decision of another, both IRR and NPV will provide the same accept or reject answers. The only added expense was the cost of the new breakfast items, the labor to prepare and sell them, a little marketing expense to let customers know that McDonald’s now served breakfast, and a few additional dollars for utilities. Aside from regular news and fi- nancial news, this site also offers a glossary of all financial terms and a calculator under ‘‘Financial Tools.’’ While a business calculator and an Excel worksheet offer quick, easy, and accurate means of calculating the value of money, many sites such as CNN also offer financial tools to educate the public. As of November 20, the Canyon Hotel and Meeting Center sold 1,593 rooms and 11,980 covers, and serviced 3,645 meeting guests. It depends on several variables. While insurance companies and pension funds make loans, they also invest equity. If your investors are going to be your partners, you need to be open and honest with them and gain their trust. Now that all cash flows have been entered, you can compute [CPT] [IRR] Display shows IRR = 14.5995* The internal rate of return is calculated as 14.5995*% Option 2 Steps in Excel Note: Type only the symbols or letters within the bracket [ ] and not the bracket itself. Mergers and Acquisitions of Competitors Once a public company reaches a certain size and has access to substantial amounts of capital, the merger and acquisition growth strategy becomes another option for the company to pursue. A&W Restaurants, Inc. ‘‘The First Frosty Mug.’’ http: / / www.awrestaurants.com / about / default.htm (accessed January 22, 2006). Their strategy was to acquire the assets for as little as 25% of replacement cost, renovate them, reposition them, turn them into proﬁtable, cash-ﬂowing assets, and then sell them at huge proﬁts. Convertible loans are often used to encourage potential equity investors to provide capital for deals they normally would perceive as too risky. 5. The more familiar you are with the ﬁnancial statements, management reports, and control systems presented in this chapter, the better your chances will be for promotion and the more effective you will be as a manager. Instead of booking a major expenditure as an expense, the financial manager could record it as a long-term asset. Expenses are reduced and the current level of revenue is maintained. Source: Kiesner, S. ‘‘Time to Turn on Energy Efficiency.’’ The Bottomline 20(8): 10, 12. A monthly fee is usually charged for this service. Projected annual sales are expected to fall between $3,200,000 and $4,200,000. One area of particular interest is the increase in administrative and general expenses of ■ 57.31%. Next, subtract the amount of the loan from your total project cost. If the business is a corporation, the investment is called common or preferred stock. When each department in a hotel or restaurant is managed by a superior manager, favorable operating results are achieved and ﬁnancial rewards are often forthcoming to all involved in the success of the operation. ➤ NPV and IRR calculations help a potential investor perform multiple investment analyses to determine if an investment will be profitable. You want to answer his objection and talk about all of the other beneﬁts of your deal—but don’t. It is not the market value of the property or its original cost, but rather the cost required to replace the hotel as is. THE REAL DEAL Effective October 28, 2004, a new federal law known as the Check Clearing for the Twenty-first Century Act—or, more commonly, Check 21—was passed to enable banks to process checks faster. CASH MANAGEMENT a. She knows investors are expecting at least 12% as their hurdle rate. You now have, as they say, skin in the deal. This situation would Once students pass all five parts of this examination, they have four years to accumulate the experience points required to become formally certified. Partners can also add value to the venture by providing new ideas, business contacts, ﬁnancial resources, and counsel on major decisions. 2 䡲 FINANCIAL REPORTING Develop a standardized balance sheet for the Caribou Restaurant. If you own stock in a company, you want a high multiple because for every dollar that earnings per share increases, the market value of the company’s common stock should increase not only by the amount of its EPS but by the multiple of EPS. 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