Financial Management for the Hospitality Industry

by Andrew, William P., Ph.D.; Schmidgall, Raymond S.

• ISBN13: 9780866120517
• ISBN10: 0866120513
• Format: Hardcover
• Copyright: 1993-08-01
• Publisher: Educational Inst of the Amer Hotel

Table of Contents

Preface	xi
About the Authors	xv
Introduction	1	(13)
The Role of Finance in the Hospitality Organization	1	(2)
Perspectives on Decision Making	3	(3)
Performance-Based Managerial Compensation Package
Boards of Directors
Threat of Takeover
The Goal of Hospitality Financial Management	6	(3)
An Overview of the Determinants of Owners' Value	9	(5)
The Minimum Value of V0[DIVt]
The Maximum Value of V0[DIVt]
The Most Likely Value of V0[DIVt]
Value Creation and the Hospitality Firm	14	(14)
Asset and Capital Structures and Value Creation	15	(3)
The Process of Value Creation	18	(2)
Increasing Operating Cash Flow
Reducing the Variability of Operating Cash Flow
Capital Structure	20	(3)
New Types of Securities
Optimal Capital Structure
Value Creation: Asset Structure Versus Capital Structure	23	(1)
Pitfalls on the Road to Value Creation: The Rate-of-Return Trap	23	(5)
A Brief Review of Financial Statements	28	(24)
The Balance Sheet	29	(3)
The Income Statement	32	(2)
The Statement of Cash Flow	34	(2)
The Statement of Retained Earnings	36	(1)
Relationship Among the Four Financial Statements	37	(1)
Footnotes	38	(1)
Development of Pro Forma Operating Statements	39	(13)
Financial Statement Analysis	52	(48)
Horizontal Analysis	53	(2)
Vertical Analysis	55	(2)
Ratio Analysis	57	(2)
Purposes of Ratio Analysis
Classes of Ratios
Liquidity Ratios	59	(6)
Current Ratio
Acid-Test Ratio
Accounts Receivable Turnover
Operating Cash Flows to Current Liabilities Ratio
Solvency Ratios	65	(5)
Debt-Equity Ratio
Long-Term Debt to Total Capitalization Ratio
Number of Times Interest Earned Ratio
Fixed Charge Coverage Ratio
Operating Cash Flows to Total Liabilities Ratio
Activity Ratios	70	(6)
Inventory Turnover
Fixed Asset Turnover
Asset Turnover Ratio
Paid Occupancy Percentage
Complimentary Occupancy Percentage
Average Occupancy Per Room
Multiple Occupancy Percentage
Profitability Ratios	76	(6)
Profit Margin
Operating Efficiency Ratio
Return on Assets
Gross Return on Assets
Return on Equity
Earnings Per Share
Price Earnings Ratio Market Value to Book Value Per Share Ratio
Viewpoints Regarding Profitability Ratios
Operating Ratios	82	(4)
Mix of Sales
Average Room Rate
Revenue Per Available Room (REVPAR)
Average Food Service Check
Food Cost Percentage
Beverage Cost Percentage
Labor Cost Percentage
Trend Analysis	86	(1)
Limitations of Ratio Analysis	86	(1)
Usefulness of Ratios: Research Results	87	(13)
Risk and Value in the Hospitality Firm	100	(34)
Incorporating Risk into the Valuation of a Hospitality Asset	102	(3)
Measuring the Characteristics of Return and Cash Flow Distributions	105	(2)
Attitudes Toward Risk and Return	107	(3)
Choosing Among Projects on the Basis of Expected Return and Total Risk	110	(3)
Reducing Risk Through Diversification	113	(8)
Adding Investments to Diversified Portfolios	121	(5)
Estimating the Components of the Security Market Line	126	(8)
The Timing and Value of Cash Flows	134	(30)
Valuing Cliams to Future Cash Flows: A Comparison Approach	135	(2)
The Basis of Time Value Calculations: The Compounding Process	137	(2)
The Present Value of a Single Cash Flow	139	(3)
The Future Value of a Single Cash Flow	142	(2)
The Present Value of a Multiple Cash Flow Stream	144	(8)
The Future Value of a Multiple Cash Flow Stream	152	(4)
The Rate of Return on an Investment	156	(2)
Non-Annual Compounding/Discounting Intervals	158	(6)
Valuation and Required Rates of Return	164	(24)
The Meaning of Worth or Value	165	(1)
The Present Value of All Future Dividends	166	(2)
Applying the Dividend Valuation Model to Project Valuation	168	(1)
Estimating ΔDIV0 and ΔDIVt	169	(3)
The Equity Approach to NPV	172	(1)
The Debt/Equity Approach to NPV	173	(1)
The Weighted Average Cost of Capital Approach to NPV	174	(5)
Using the WACC Approach: An Example
Using the WACC Approach: Some Considerations
The Adjusted Present Value Approach to NPV Estimation	179	(9)
Capital Expenditure Analysis	188	(24)
Capital Expenditures	189	(1)
Cash Flows Versus Accounting Income	190	(1)
The Incremental Cash Flow Principle	190	(1)
Opportunity Costs	190	(1)
Tax Considerations	191	(1)
Sunk Costs	192	(1)
Allocated Costs	192	(1)
Excess Capacity	193	(1)
Investment in Net Working Capital	193	(1)
Accelerated Versus Straight-Line Depreciation	194	(1)
Accounting for the Effects of Inflation	194	(1)
Expanding on Our Basic WACC Approach to NPV	195	(1)
An Example of Capital Expenditure Analysis	196	(5)
Analyzing Other Types of Projects	201	(11)
Mutually Exclusive Project Alternatives
Capital Rationing
Other Project Valuation Criteria	212	(20)
Accounting Rates of Return	213	(1)
The Payback Criterion	214	(3)
The Internal Rate of Return	217	(7)
Calculating the IRR
Using the IRR for Valuation Decisions
Potential Problems with the IRR
Using Capital Budgeting Criteria: An Example	224	(8)
Accounting Rate of Return
Payback
Internal Rate of Return
Net Present Value
Additional Project Valuation Criteria
Issues in Capital Structure Management	232	(14)
The Main Considerations in the Financing Decision	233	(1)
When Capital Structure Does Not Matter	234	(3)
The Effect of Taxes on Optimal Capital Structure	237	(1)
The Effect of Costly Financial Distress	238	(2)
The Effect of Other Perfect Market Assumptions	240	(1)
Optimal Capital Structure in the Hospitality Industry	240	(2)
The Maturity Composition of a Hospitality Firm's Debt	242	(1)
The Importance of Optimizing Capital Structure	242	(4)
Financial Markets and Raising Financial Capital	246	(22)
Real Assets Versus Financial Assets	247	(1)
The Role of the Financial Markets	247	(1)
The Role of Financial Intermediaries	248	(1)
Subcomponents of the Financial Market	249	(1)
Examples of Major Financial Markets	249	(4)
The Money Market
The Capital Market
The Mortgage Market
Additional Market Terminology
How Trading Takes Place in the Stock and Bond Markets	253	(3)
Interpreting Financial Information on Stock and Bond Trading	256	(2)
The Stock Report
The Bond Report
Financial Intermediaries and Their Role in Hospitality Financing	258	(3)
Commercial Banks
Savings and Loan Associations
Life Insurance Companies
Brokerage Firms
Pension Funds
Mutual Funds
Other Sources of Capital for Hospitality Firms
International Hospitality Firms and the Foreign Exchange Markets	261	(2)
Price Risk and the Commodity Futures Markets	263	(5)
Managing an Enterprise's Working Capital	268	(32)
Working Capital	269	(3)
Net Working Capital Requirements
Cash Budgets	272	(8)
Cash Receipts and Disbursements Approach
Adjusted Net Income Approach
A Simplified Cash Budget Illustration
Minimum Cash Balances
Cash Management in Hospitality Chains	280	(1)
Float	281	(1)
Speeding Collections	281	(1)
Controlling Disbursements	282	(1)
Bank Charges/Relations	283	(1)
Managing Accounts Receivable	283	(2)
Inventory	285	(1)
Managing Payables	285	(2)
Trade Payables
Short-Term Bank Loans	287	(1)
Term Loans	288	(1)
Investing Excess Working Capital	289	(11)
U.S. Treasury Bills
Time Deposits and Certificates of Deposit
Leasing	300	(22)
Leases and Their Uses	301	(1)
Major Provisions of Lease Contracts	302	(3)
Accounting Classifications of Leases	305	(4)
Accounting for Operating Leases
Accounting for Capital Leases
Other Classifications of Leases
Sale and Leaseback	309	(1)
Advantages and Disadvantages of Leasing	310	(1)
Choosing to Lease or Buy	311	(11)
Expansion Via Franchising	322	(22)
Franchising Defined	323	(2)
Types of Franchises
Franchising of Lodging and Food Service Chains	325	(7)
Benefits to the Franchisee
Franchisee Fees
Risks of Franchising
Benefits to the Franchisor
Disadvantages to the Franchisor
Franchising Friction and Solutions	332	(2)
The Franchise Agreement	334	(10)
Expansion via Management Contracts	344	(20)
Parties to a Management Contracts	345	(2)
Reasons for Growth in Management Companies	347	(1)
Responsibilities of Management Companies	347	(1)
Responsibilities of Owners	348	(1)
Management Fees	348	(4)
Management Fee Structures
System Reimbursable Charges
Advantages of Management Contracts to Lodging Companies	352	(1)
Disadvantages of Management Contracts to Lodging Companies	353	(1)
Major Provisions of the Management Contract	353	(11)
Economic Studies	364	(28)
Purposes, Preparers, and Users of Economic Studies	365	(2)
Preparers of Studies
Users of Studies
Types of Economic Studies	367	(3)
Market Study
Lodging Feasibility Study
Feasibility Study
Conducting the Lodging Feasibility Study	370	(4)
The Lodging Feasibility Study Report	374	(8)
Introduction
Summary of Conclusions
Site Evaluation
Market Area Analysis
Supply and Demand Analysis
Facilities Review
Estimated Occupancy and Average Daily Room Rate
Financial Analyses
Limitations of the Lodging Feasibility Study	382	(10)
Valuation of Hospitality Real Estate	392	(28)
What Is Value?	393	(1)
Uses of Appraisals	394	(1)
The Valuation Process	395	(2)
Approaches to Valuation	397	(23)
The Cost Approach
The Sales Comparison Approach
The Income Capitalization Approach
Two-to-Five-Year Projection Using Equity Dividend
Gross Income Multipliers
Income Taxes	420	(31)
A Permeating Force in Economic Business Decisions	421	(1)
History and Objectives of Federal Income Taxes	421	(1)
Tax Basics	422	(3)
Income and Adjustments
Deductions, Exemptions, and Taxable Income
Taxes and Credits
Alternative Minimum Tax
A Tax Illustration
Tax Avoidance	425	(6)
Forms of Business Organization	431	(5)
Sole Proprietorships
Partnerships
Limited Partnerships
Corporations
S Corporations
Minimizing Taxes	436	(3)
Accounting Methods	439	(1)
Cash Versus Accrual Method
Accounting Income Versus Taxable Income	440	(2)
Accelerated Depreciation
Pre-Opening Expenses
First-Year Losses
Loss Carrybacks and Carryforwards
State and Municipal Taxes	442	(1)
Property Taxes	442	(9)
Glossary	451	(18)
Index	469