Financial Management For The Hospitality Industry

by Andrew, William P.; Damitio, James W., Ph.D, CMA; Schmidgall, Raymond S.

• ISBN13: 9780131179097
• ISBN10: 0131179098
• Edition: 1st
• Format: Paperback
• Copyright: 2006-06-16
• Publisher: Pearson

Summary

KEY BENEFIT:Financial Management for the Hospitality Industrypresents financial concepts and explains how they apply to specific operations within the hospitality industry.KEY TOPICS: The book contains answers to many of the financial questions confronting todayrs"s and tomorrowrs"s hospitality managers. It should serve as a reference book to be used as financial problems and opportunities arise.MARKET: For hospitality managers.

Table of Contents

Preface	xvi
About the Authors	xix
1 Introduction	1	(16)
The Role of Finance in the Hospitality Organization	2	(1)
Perspectives on Decision Making	3	(5)
Performance-Based Managerial Compensation Packages	6	(1)
Boards of Directors	7	(1)
Threat of Takeover	7	(1)
The Goal of Hospitality Financial Management	8	(3)
An Overview of the Determinants of Owners' Value	11	(3)
The Minimum Value of V0 [DIVt]	12	(1)
The Maximum Value of V0 [DIVt]	13	(1)
The Most Likely Value of V0 [DIVt]	13	(1)
Summary	14	(1)
Key Terms	14	(1)
Review Questions	15	(2)
2 Value Creation and the Hospitality Firm	17	(16)
Asset and Capital Structures and Value Creation	17	(5)
The Process of Value Creation	22	(2)
Increasing Operating Cash Flow	22	(2)
Reducing the Variability of Operating Cash Flow	24	(1)
Capital Structure	24	(3)
New Types of Securities	25	(1)
Optimal Capital Structure	25	(2)
Value Creation: Asset Structure Versus Capital Structure	27	(1)
Pitfalls on the Road to Value Creation: The Rate-of-Return Trap	28	(2)
Summary	30	(1)
Endnotes	30	(1)
Key Terms	31	(1)
Review Questions	31	(2)
3 Financial Markets and Raising Financial Capital	33	(26)
Real Assets Versus Financial Assets	34	(1)
The Role of the Financial Markets	34	(1)
The Role of Financial Intermediaries	35	(1)
Subcomponents of the Financial Market	36	(1)
Examples of Major Financial Markets	36	(6)
The Money Market	37	(3)
The Capital Market	40	(1)
The Mortgage Market	40	(1)
Additional Market Terminology	41	(1)
How Trading Takes Place in the Stock and Bond Markets	42	(3)
Interpreting Financial Information on Stock and Bond Trading	45	(3)
The Stock Report	45	(1)
The Bond Report	46	(2)
Financial Intermediaries and Their Role in Hospitality Financing	48	(3)
Commercial Banks	48	(1)
Life Insurance Companies	48	(1)
Brokerage Firms	49	(1)
Pension Funds	49	(1)
Mutual Funds	49	(1)
Other Sources of Capital for Hospitality Firms	50	(1)
International Hospitality Firms and Foreign Exchange Markets	51	(3)
Price Risk and the Commodity Futures Markets	54	(1)
Summary	55	(1)
Endnotes	55	(1)
Key Terms	56	(1)
Review Questions	56	(1)
Problems	57	(2)
4 A Brief Review of Financial Statements	59	(32)
The Nature of Financial Statements	60	(2)
Sales on Account/Receivables	60	(1)
Depreciation	61	(1)
The Balance Sheet	62	(4)
The Income Statement	66	(4)
The Statement of Cash Flow	70	(3)
The Statement of Retained Earnings	73	(1)
Relationship Among the Four Financial Statements	74	(1)
Footnotes	74	(1)
Development of Pro Forma Operating Statements	75	(3)
Summary	78	(1)
Endnotes	78	(1)
Key Terms	79	(1)
Review Questions	79	(1)
Problems	79	(12)
5 Financial Statement Analysis	91	(62)
Horizontal Analysis	92	(1)
Vertical Analysis	93	(4)
Ratio Analysis	97	(3)
Purposes of Ratio Analysis	98	(1)
Classes of Ratios	99	(1)
Liquidity Ratios	100	(8)
Current Ratio	100	(5)
Acid-Test Ratio	105	(1)
Accounts Receivable Turnover	106	(2)
Operating Cash Flows to Current Liabilities Ratio	108	(1)
Solvency Ratios	108	(5)
Debt-Equity Ratio	110	(1)
Long-Term Debt to Total Capitalization Ratio	111	(1)
Number of Times Interest Earned Ratio	111	(1)
Fixed Charge Coverage Ratio	112	(1)
Operating Cash Flows to Total Liabilities Ratio	113	(1)
Activity Ratios	113	(7)
Inventory Turnover	114	(2)
Property and Equipment Turnover	116	(1)
Asset Turnover Ratio	117	(1)
Paid Occupancy Percentage	118	(1)
Complimentary Occupancy Percentage	119	(1)
Number of Guests Per Occupied Room	119	(1)
Multiple Occupancy Percentage	120	(1)
Profitability Ratios	120	(7)
Profit Margin	121	(1)
Operating Efficiency Ratio	122	(1)
Return on Assets	122	(1)
Gross Return on Assets	123	(1)
Return on Equity	124	(1)
Earnings Per Share	124	(1)
Price Earnings Ratio	125	(1)
Market Value to Book Value Per Share Ratio	126	(1)
Viewpoints Regarding Profitability Ratios	126	(1)
Operating Ratios	127	(5)
Mix of Sales	128	(1)
Average Room Rate	129	(1)
Revenue Per Available Room (REVPAR)	129	(1)
Average Food Service Check	130	(1)
Food Cost Percentage	130	(1)
Beverage Cost Percentage	131	(1)
Labor Cost Percentage	131	(1)
DuPont System of Analysis	132	(2)
Trend Analysis	134	(1)
Limitations of Ratio Analysis	134	(1)
Usefulness of Ratios: Research Results	135	(1)
Summary	136	(2)
Key Terms	138	(1)
Review Questions	139	(1)
Problems	139	(14)
6 Risk and Value in the Hospitality Firm	153	(40)
Incorporating Risk into the Valuation of a Hospitality Asset	155	(4)
Measuring the Characteristics of Return and Cash Flow Distributions	159	(3)
Attitudes Toward Risk and Return	162	(2)
Choosing Among Projects on the Basis of Expected Return and Total Risk	164	(4)
Reducing Risk Through Diversification	168	(10)
Adding Investments to Diversified Portfolios	178	(5)
Estimating the Components of the Security Market Line	183	(3)
Summary	186	(1)
Endnotes	186	(1)
Key Terms	187	(1)
Review Questions	187	(1)
Problems	188	(5)
7 The Timing and Value of Cash Flows	193	(38)
Valuing Claims to Future Cash Flows: A Comparison Approach	193	(3)
The Basis of Time Value Calculations: The Compounding Process	196	(2)
The Present Value of a Single Cash Flow	198	(5)
The Future Value of a Single Cash Flow	203	(3)
The Present Value of a Multiple Cash Flow Stream	206	(10)
The Future Value of a Multiple Cash Flow Stream	216	(6)
The Rate of Return on an Investment	222	(2)
Non-Annual Compounding/Discounting Intervals	224	(1)
Summary	225	(1)
Key Terms	226	(1)
Review Questions 226 Problems	227	(4)
8 Valuation and Required Rates of Return	231	(26)
The Meaning of Worth or Value	232	(1)
The Present Value of All Future Dividends	232	(3)
Applying the Dividend Valuation Model to Project Valuation	235	(1)
Estimating ADIV0 and ADIV,	236	(3)
The Equity Approach to NPV	239	(1)
The Debt/Equity Approach to NPV	240	(2)
The Weighted Average Cost of Capital Approach to NPV	242	(6)
Using the WACC Approach: An Example	244	(3)
Using the WACC Approach: Some Considerations	247	(1)
The Adjusted Present Value Approach to NPV Estimation	248	(1)
Summary	249	(1)
Endnotes	250	(2)
Key Terms	252	(1)
Review Questions	252	(1)
Problems	252	(5)
9 Capital Expenditure Analysis	257	(32)
Capital Expenditures	258	(1)
Cash Flows Versus Accounting Income	258	(1)
The Incremental Cash Flow Principle	259	(1)
Opportunity Costs	259	(1)
Tax Considerations	260	(1)
Sunk Costs	261	(1)
Allocated Costs	262	(1)
Excess Capacity	262	(1)
Investment in Net Working Capital	263	(1)
Accelerated Versus Straight-Line Depreciation	264	(1)
Accounting for the Effects of Inflation	264	(2)
Expanding on Our Basic WACC Approach to NPV	266	(1)
An Example of Capital Expenditure Analysis for a Small Project	266	(5)
An Example of Capital Expenditure Analysis for a Large Project	271	(7)
Analyzing Other Types of Projects	278	(1)
Mutually Exclusive Project Alternatives	278	(1)
Capital Rationing	278	(1)
Summary	279	(1)
Key Terms	279	(1)
Review Questions	279	(1)
Problems	280	(9)
10 Other Project Valuation Criteria	289	(24)
Accounting Rates of Return	289	(2)
The Payback Criterion	291	(3)
The Internal Rate of Return	294	(8)
Calculating the IRR	295	(3)
Using the IRR for Valuation Decisions	298	(1)
Potential Problems with the IRR	299	(3)
Using Capital Budgeting Criteria: An Example	302	(3)
Accounting Rate of Return	303	(1)
Payback	304	(1)
Internal Rate of Return	304	(1)
Net Present Value	305	(1)
Additional Project Valuation Criteria	305	(1)
Summary	305	(1)
Endnotes	306	(1)
Key Terms	306	(1)
Review Questions	307	(1)
Problems	307	(6)
11 Issues in Capital Structure Management	313	(18)
The Main Considerations in the Financing Decision	313	(1)
When Capital Structure Does Not Matter	314	(5)
The Effect of Taxes on Optimal Capital Structure	319	(2)
The Effect of Costly Financial Distress	321	(2)
The Effect of Other Perfect Market Assumptions	323	(1)
Optimal Capital Structure in the Hospitality Industry	324	(2)
The Maturity Composition of a Hospitality Firm's Debt	326	(1)
The Importance of Optimizing Capital Structure	327	(1)
Summary	327	(1)
Endnotes	328	(1)
Key Terms	329	(1)
Review Questions	329	(1)
Problems	330	(1)
12 Financial Planning for the Hospitality Entrepreneur	331	(24)
Nature of Entrepreneurship	331	(1)
Characteristics of Entrepreneurs	332	(1)
Legal Forms of Entrepreneurial Ventures	332	(5)
Sole Proprietorships	333	(1)
Partnerships	334	(1)
Limited Partnerships	335	(1)
Corporations	336	(1)
S Corporations	336	(1)
Limited Liability Company (LLC)	337	(1)
Regulatory Considerations for the Hospitality Venture	337	(2)
Business Plan Outline	339	(3)
Commercial Bank Loans	342	(5)
Other Sources of Financing for the Entrepreneurial Venture	347	(1)
Term Loans	348	(2)
Summary	350	(1)
Endnotes	350	(1)
Key Terms	350	(1)
Review Questions	351	(1)
Problems	351	(4)
13 Managing an Enterprise's Working Capital	355	(38)
Working Capital	356	(4)
Net Working Capital Requirements	359	(1)
Cash Budgets	360	(8)
Cash Receipts and Disbursements Approach	360	(2)
Adjusted Net Income Approach	362	(1)
A Simplified Cash Budget Illustration	363	(4)
Minimum Cash Balances	367	(1)
Cash Management in Hospitality Chains	368	(1)
Float	369	(1)
Speeding Collections	370	(1)
Controlling Disbursements	371	(1)
Bank Charges/Relations	372	(1)
Managing Accounts Receivable	373	(3)
Credit Selection and Standards	373	(2)
Credit Terms	375	(1)
Credit Monitoring	375	(1)
Inventory	376	(4)
Managing Payables	378	(1)
Trade Payables	379	(1)
Short-Term Bank Loans	380	(1)
Investing Excess Working Capital	381	(2)
U.S. Treasury Bills	382	(1)
Time Deposits and Certificates of Deposit	382	(1)
Summary	383	(1)
Endnotes	384	(1)
Key Terms	384	(1)
Review Questions	384	(1)
Problems	385	(8)
14 Asset Management in the Hospitality Industry	393	(16)
Nature of Asset Management	393	(1)
Asset Management Companies	394	(1)
Strategic Plan for Asset Management	394	(2)
Hotel Operations Audit	396	(8)
Tour of Facility	396	(1)
Revenue Evaluation	396	(4)
Departmental Expenses	400	(3)
Undistributed Expenses	403	(1)
Fixed Expenses	403	(1)
Summary	404	(1)
Key Terms	405	(1)
Review Questions	405	(1)
Problems	405	(4)
15 Leasing	409	(26)
Leases and Their Uses	409	(2)
Major Provisions of Lease Contracts	411	(4)
Accounting Classifications of Leases	415	(4)
Accounting for Operating Leases	416	(1)
Accounting for Capital Leases	417	(2)
Other Classifications of Leases	419	(1)
Sale and Leaseback	419	(1)
Advantages and Disadvantages of Leasing	420	(1)
Choosing to Lease or Buy	421	(4)
Summary	425	(1)
Endnotes	425	(1)
Key Terms	425	(1)
Review Questions	426	(1)
Problems	426	(9)
16 Expansion Via Franchising	435	(26)
Franchising Defined	436	(2)
Types of Franchises	437	(1)
Franchising of Lodging and Food Service Chains	438	(8)
Benefits to the Franchisee	439	(2)
Franchisee Fees	441	(3)
Risks of Franchising	444	(1)
Benefits to the Franchisor	445	(1)
Disadvantages to the Franchisor	445	(1)
Franchising Friction and Solutions	446	(2)
The Franchise Agreement	448	(2)
Summary	450	(1)
Endnotes	451	(1)
Key Terms	451	(1)
Review Questions	451	(1)
Problems	452	(9)
17 Expansion Via Management Contracts	461	(26)
Parties to a Management Contract	462	(2)
Reasons for Growth in Management Contracts	464	(1)
Responsibilities of Management Companies	464	(2)
Responsibilities of Owners	466	(1)
Management Fees	466	(4)
Management Fee Structures	467	(2)
System Reimbursable Charges	469	(1)
Advantages of Management Contracts to Lodging Companies	470	(1)
Disadvantages of Management Contracts to Lodging Companies	471	(1)
Major Provisions of the Management Contract	472	(4)
Summary	476	(1)
Endnotes	476	(1)
Key Terms	477	(1)
Review Questions	477	(1)
Problems	478	(9)
18 Feasibility Studies	487	(38)
Purposes, Preparers, and Users of Feasibility Studies	488	(3)
Preparers of Studies	488	(2)
Users of Studies	490	(1)
Types of Feasibility Studies	491	(3)
Demand Analysis	491	(1)
Lodging Feasibility Study	492	(2)
Conducting the Feasibility Study	494	(7)
The Feasibility Study Report	501	(11)
Introduction	501	(1)
Summary of Conclusions	501	(1)
Site Evaluation	502	(1)
Market Area Analysis	502	(2)
Supply and Demand Analysis	504	(1)
Facilities Review	505	(2)
Estimated Occupancy and Average Daily Room Rate	507	(2)
Advanced Concepts	509	(1)
Pro Forma Analysis	510	(2)
Limitations of the Lodging Feasibility Study	512	(1)
Summary	513	(1)
Key Terms	513	(1)
Review Questions	514	(1)
Problems	514	(11)
19 Valuation of Hospitality Real Estate	525	(34)
What Is Value?	525	(2)
Uses of Appraisals	527	(1)
The Valuation Process	527	(3)
Approaches to Valuation	530	(16)
The Cost Approach	530	(2)
The Sales Comparison Approach	532	(3)
The Income Capitalization Approach	535	(8)
Two-to-Five-Year Projection Using Equity Dividend	543	(1)
Gross Income Multipliers	544	(2)
Summary	546	(1)
Endnotes	546	(1)
Key Terms	546	(1)
Review Questions	547	(1)
Problems	547	(12)
20 Income Taxes	559	(40)
A Permeating Force in Economic Business Decisions	560	(1)
Types of Taxes	560	(1)
History and Objectives of Federal Income Taxes	561	(1)
Tax Basics	562	(10)
Income, Income Exclusions, and Adjustments	563	(1)
Deductions, Exemptions, and Taxable Income	563	(1)
Taxes and Credits	563	(1)
Alternative Minimum Tax	564	(1)
A Tax Illustration	565	(6)
Marginal and Average Rates	571	(1)
Capital Gains and Losses	571	(1)
Tax Avoidance	572	(1)
Forms of Business Organization	573	(6)
Sole Proprietorship	574	(1)
Partnership	575	(1)
Limited Partnership	576	(1)
Limited Liability Companies	577	(1)
Corporations	577	(2)
S Corporations	579	(1)
Minimizing Taxes	579	(4)
Accounting Methods	583	(1)
Cash Versus Accrual Method	583	(1)
Accounting Income Versus Taxable Income	584	(2)
Accelerated Depreciation	584	(2)
First-Year Losses	586	(1)
Loss Carrybacks and Carryforwards	586	(1)
State and Municipal Taxes	586	(1)
Property Taxes	587	(1)
Summary	588	(1)
Endnotes	589	(1)
Key Terms	589	(1)
Review Questions	589	(1)
Problems	590	(9)
Glossary	599	(26)
Index	625