Hospitality Financial Managment

by Chatfield, Robert E.; Dalbor, Michael C.

• ISBN13: 9780130482877
• ISBN10: 0130482870
• Edition: 1st
• Format: Paperback
• Copyright: 2019-10-25
• Publisher: Pearson

Summary

This up-to-date introduction to finance, written for those in hospitality careers, explains and demonstrates the importance of financial management within the hospitality organization. This clear and concise book provides many examples and is primarily based on practical applications and less on theoretical foundationskeeping hospitality professionals tuned into finance without intimidating them with a typical ¿finance¿ book.Financial Markets and Financial Instruments; Review of Financial Statements and Selected Ratios; The Relationship Between Risk and Return; Time Value of Money; Fixed Income Securities: Bonds & Preferred Stock; Common Stock Features; Cost of Capital; Capital Budgeting and Cash Flow Estimation; Capital Budgeting Decision Methods; Hotel Valuation; and Capital Structure.For those in hospitality/travel tourism professions.

Author Biography

Robert E. Chatfield is professor of finance and director of MBA programs at the College of Business, University of Nevada, Las Vegas. Previously, he was an associate professor of finance at Texas Tech University and an assistant professor of finance at the University of New Mexico.

Professor Chatfield has been teaching financial management for over 25 years and has taught financial management to hospitality students at UNLV for the past 15 years. He has worked as a financial consultant to the gaming industry in Las Vegas. He has also received teaching excellence awards both at Texas Tech University and Purdue University.

Professor Chatfield has been a productive researcher, publishing in a number of leading finance journals, including Financial Management, Journal of Financial and Quantitative Analysis, the Financial Review, International Journal of Forecasting, Journal of Money, Credit and Banking, Quarterly Journal of Business and Economics, and Journal of Economics and Business.

Professor Chatfield enjoys athletics and especially likes to participate in tennis, white-water rafting, and is a novice ballroom dancer.

Michael C. Dalbor is an assistant professor in the William F. Harrah College of Hotel Administration at the University of Nevada, Las Vegas. He holds a B.S. in Food Service and Housing Administration from the Pennsylvania State University and an M.B.A. in finance from Loyola College in Maryland. He also holds a Ph.D. in Hotel, Restaurant, and Institutional Finance from the Pennsylvania State University.

He has published articles in the Journal of Hospitality Tourism Research, the Cornell Hotel and Restaurant Administration Quarterly, the Appraisal Journal, the International Journal of Hospitality Management, and the Journal of Hospitality Financial Management. He is active in the Association of Hospitality Financial Management Education and the Council on Hotel, Restaurant, and Institutional Education. He has worked in various management positions in the hospitality industry, including food and beverage management and as a purchasing agent. He has also conducted numerous market analyses and feasibility studies as a hotel consultant and has been a commercial real estate appraiser specializing in hotel valuation.

Table of Contents

Brief Contents	v
Preface	xv
Introduction	1	(14)
Chapter Objectives	1	(1)
Introduction	1	(1)
The Relationship of Financial Management to Other Functional Areas of Management	2	(1)
Organization of the Firm	3	(3)
A Basic Understanding of Financial Management	6	(1)
Wealth Maximization	7	(5)
Different Individuals, Differing Objectives	9	(1)
Taking Actions to Increase Value	10	(1)
Undertaking Projects to Create Value	10	(2)
A General Outline of the Textbook	12	(1)
Summary	13	(2)
Key Terms	13	(1)
Discussion Questions	13	(2)
Financial Markets and Financial Instruments	15	(18)
Chapter Objectives	15	(1)
Walt Disney Company	15	(1)
Introduction	16	(1)
Why People Invest	16	(2)
Description of Stock	16	(1)
Description of Bonds	17	(1)
Capital Markets	18	(2)
New York Stock Exchange	18	(1)
NASDAQ	19	(1)
Other Stock Exchanges	19	(1)
Bond Market	19	(1)
Mortgage Market	20	(1)
Money Market	20	(1)
Raising Financial Capital and Security Trading	21	(1)
Financial Markets and Hedging Risk	22	(3)
Forward and Futures Contracts	22	(1)
Foreign Exchange Markets	23	(1)
Commodity Markets	24	(1)
Key Financial Intermediaries: Lenders to the Hospitality Industry	25	(1)
Commercial Banks	25	(1)
Real Estate Investment Trusts (REITs)	26	(1)
Insurance Companies and Pension Funds	26	(1)
Stock Market Performance	26	(3)
Dow Jones Industrial Average	27	(1)
Standard & Poor's 500	27	(1)
Market Performance in Terms of Return	27	(2)
Summary	29	(4)
Key Terms	29	(1)
Discussion Questions	29	(1)
Problems	30	(3)
Review of Financial Statements and Selected Ratios	33	(32)
Chapter Objectives	33	(1)
Proper Ratios	33	(1)
Introduction	34	(1)
Review of the Income Statement	34	(5)
Uniform System of Accounts for Hotels	34	(1)
Hotel Income Statement	35	(1)
Restaurant Income Statement	35	(4)
Review of the Balance Sheet	39	(2)
Relationship Between the Income Statement and the Balance Sheet	41	(2)
Statement of Retained Earnings	43	(1)
Statement of Cash Flows	43	(2)
Validity of Financial Statements	45	(1)
Ratio Analysis	46	(11)
Classes of Ratios	47	(10)
Perspectives on and Limitations of Ratio Analysis	57	(2)
Summary	59	(6)
Key Terms	59	(1)
Discussion Questions	59	(2)
Problems	61	(4)
The Relationship Between Risk and Return	65	(22)
Chapter Objectives	65	(1)
Introduction	65	(1)
How Typical Investors Feel About Risk	65	(2)
Returns and Distributions	67	(5)
Expected Return	67	(1)
The Normal Distribution	68	(1)
Variance and Standard Deviation	69	(1)
Standard Deviation and Risk Aversion	70	(2)
Diversification	72	(3)
Benefits of a Portfolio	72	(1)
Correlation Coefficient	72	(3)
The Market Portfolio	75	(3)
What Makes the Market Portfolio Unique	77	(1)
The Market Portfolio and Risk Composition	77	(1)
The Market Portfolio and Beta	78	(2)
Beta, Expected Return, and the Security Market Line	80	(3)
The Limitations of the CAPM	81	(1)
Betas for Hospitality Assets	82	(1)
Is the Restaurant Business Risky?	82	(1)
Summary	83	(4)
Key Terms	83	(1)
Discussion Questions	84	(1)
Problems	84	(3)
Time Value of Money	87	(38)
Chapter Objectives	87	(1)
Introduction	87	(1)
Future Value---Compounding	88	(4)
Present Value---Discounting	92	(3)
Future Value of an Annuity	95	(5)
Present Value of an Annuity	100	(5)
Perpetuity---An Infinite Annuity	105	(1)
Present Value of a Deferred Annuity	106	(4)
Present Value of a Series of Nonconstant Cash Flows	110	(1)
Compounding Periods Other Than Annual	111	(1)
Effective Annual Rates	112	(1)
Amortized Loans	113	(2)
Summary	115	(10)
Key Terms	116	(1)
Discussion Questions	116	(1)
Problems	116	(4)
Using a Business Calculator Programmed for Financial Mathematics	120	(2)
Using a Financial Calculator to Compute Effective Annual Rates	122	(3)
Fixed-Income Securities: Bonds and Preferred Stock	125	(18)
Chapter Objectives	125	(1)
Introduction	125	(1)
Basic Bond Terminology	126	(1)
Bond Features	126	(3)
Bond Ratings	129	(1)
Valuing Corporate Bonds	130	(3)
Computing Yield to Maturity on Corporate Bonds	133	(1)
Bonds with Semiannual Coupon Payments	134	(1)
Basic Preferred Stock Terminology	135	(1)
Preferred Stock Features	136	(1)
Valuing Preferred Stock	137	(1)
Summary	138	(5)
Key Terms	139	(1)
Discussion Questions	139	(1)
Problems	139	(2)
Using a Business Calculator to Solve the Value of a Corporate Bond	141	(1)
Using a Business Calculator to Compute a Bond's Yield to Maturity	142	(1)
Common Stock	143	(18)
Chapter Objectives	143	(1)
Introduction	143	(1)
Common Stock Features	144	(1)
Valuing Common Stock	145	(2)
General Dividend Valuation Model	147	(1)
Zero-Growth Dividend Valuation Model	148	(2)
Constant-Growth Dividend Valuation Model	150	(2)
Valuing Common Stock with Multiple Growth Rates	152	(3)
Common Stock Value, Investor's Rate of Return and Growth	155	(1)
Summary	156	(5)
Key Terms	157	(1)
Discussion Questions	157	(1)
Problems	158	(3)
Cost of Capital	161	(22)
Chapter Objectives	161	(1)
Introduction	161	(1)
The Weighted Average Cost of Capital	162	(1)
Estimating the Cost of Capital Components	163	(1)
The Cost of Debt	164	(3)
The Cost of Preferred Stock	167	(1)
Internal Common Equity---New Retained Earnings	168	(1)
Dividend Valuation Model Method for Estimating the Cost of Internal Equity	169	(1)
Capital Asset Pricing Model Method for Estimating the Cost of Internal Equity	170	(2)
The Bond Yield Plus Risk Premium Method for Estimating the Cost of Internal Equity	172	(1)
External Common Equity---New Issues of Common Stock	172	(2)
Computation of the Weighted Average Cost of Capital	174	(4)
Using the Weighted Average Cost of Capital	178	(1)
Summary	179	(4)
Key Terms	179	(1)
Discussion Questions	179	(1)
Problems	180	(3)
Introduction to Capital Budgeting and Cash Flow Estimation	183	(20)
Chapter Objectives	183	(1)
Introduction	183	(2)
Classifying Capital Budgeting Projects	185	(1)
The Capital Budgeting Decision and Cash Flow Estimation	186	(10)
Net Investment Estimation	187	(2)
Net Cash Flow Estimation	189	(3)
Estimation of After-Tax Salvage Values	192	(1)
Depreciation	193	(3)
Summary	196	(7)
Key Terms	197	(1)
Discussion Questions	197	(1)
Problems	198	(2)
Modified Accelerated Cost Recovery System	200	(3)
Capital Budgeting Decision Methods	203	(34)
Chapter Objectives	203	(1)
Introduction	203	(1)
Capital Budgeting Decision Methods	204	(11)
Payback Period	205	(1)
Discounted Payback Period	206	(3)
Net Present Value	209	(1)
Profitability Index	210	(1)
Internal Rate of Return	211	(2)
Modified Internal Rate of Return	213	(2)
Independent Projects and Capital Budgeting Decision Methods	215	(1)
Mutually Exclusive Projects and Capital Budgeting Decision Methods	216	(3)
Scale Differences	216	(1)
Cash Flow Timing Differences	217	(2)
Not-Normal Cash Flows	219	(2)
The Use of Capital Budgeting Decision Methods	221	(2)
Summary	223	(14)
Key Terms	223	(1)
Discussion Questions	223	(1)
Problems	224	(3)
Computing NPV and IRR with Financial Calculators	227	(3)
Hospitality Capital Budgeting Example	230	(7)
An Introduction to Hotel Valuation	237	(28)
Chapter Objectives	237	(1)
HVS International Hotel Appraisal Specialists	237	(1)
Introduction	238	(1)
Reasons for a Hotel Appraisal	238	(1)
Parties Involved in the Process	238	(1)
The Hotel Appraisal Process	239	(8)
Purpose of the Appraisal	240	(1)
Data Collection	240	(7)
Highest and Best Use Analysis	247	(1)
Approaches to Value	247	(13)
The Cost Approach to Value	248	(1)
The Sales Comparison Approach	249	(1)
The Income Capitalization Approach	250	(8)
Direct Capitalization	258	(1)
Yield Capitalization	259	(1)
A Rule of Thumb Approach and Revenue Multipliers	260	(1)
Final Reconciliation of Value	261	(1)
Summary	261	(4)
Key Terms	262	(1)
Discussion Questions	262	(1)
Problems	262	(3)
Capital Structure	265	(16)
Chapter Objectives	265	(1)
Introduction	265	(1)
Financial Risk	266	(2)
Business Risk	268	(1)
Capital Structure Theory	269	(5)
The Cost of Debt Versus the Cost of Equity	270	(1)
The Cost of Financial Distress	270	(1)
The Agency Cost of Debt Financing	271	(1)
Financial Leverage and the Cost of Debt	272	(1)
Financial Leverage and the Cost of Equity	272	(1)
The Weighted Average Cost of Capital and Optimal Capital Structure	273	(1)
Other Significant Factors in the Determination of a Firm's Capital Structure	274	(3)
Industry Standards	274	(1)
Creditor and Rating Agency Requirements	275	(1)
The Need for Excess Borrowing Capacity	275	(1)
Profitability and the Need for Funds	276	(1)
Managerial Risk Aversion	276	(1)
Corporate Control	276	(1)
Summary	277	(4)
Key Terms	277	(1)
Discussion Questions	278	(1)
Problems	278	(3)
Glossary	281	(6)
Index	287

Excerpts

Hospitality Financial Managementis intended as a first finance course for hospitality and tourism students. It may also be useful to hospitality industry professionals who want to know more about the financial management function in the hospitality industry. This book focuses primarily on long-term finance decisions, especially the hospitality firm''s capital budgeting decision. Given the fixed asset intensiveness of the industry, capital budgeting is an important process for hospitality and tourism students to understand. Additionally, a significant amount of background information is required to fully understand this process. The text has a number of features to facilitate learning and understanding. Each chapter begins with a list of objectives and an introduction to the chapter content. Chapters conclude with discussion questions and problems that demonstrate key concepts. Problems that may be solved by using Excel spreadsheets are indicated with EXCELin the margin, with spreadsheets accessible online at www.prenhall.com/chatfield. Key terms and concepts are identified and defined in the glossary. Chapter 1 provides an introduction to hospitality financial management. Various types of business organization are discussed along with an introduction to agency problems and the concept of value creation. Chapter 2 provides an introduction to financial markets and financial instruments. Foreign exchange and commodity markets are also discussed. Chapter 3 reviews the major financial statements and discusses some of the key ratios used in the hospitality industry. It also discusses the limitations of ratio analysis. Chapter 4 introduces the student to the concept of risk and return. The important features of the chapter include the market portfolio and the capital asset pricing model. Chapter 5 covers the time value of money. This includes discounting and compounding and demonstrates a wide variety of applications. The appendix to this chapter demonstrates how to solve time value of money problems using two different financial calculators. Chapter 6 discusses bonds and preferred stock. This chapter explains the basic approach to both bond and preferred stock valuation. It also includes examples of bonds and preferred stocks issued by hospitality firms. Chapter 7 covers common stock. It features common stock terminology as well as an introduction to basic common stock valuation. Chapter 8 focuses on the cost of capital. This chapter elaborates on how the weighted cost of capital is derived. Chapter 9 is an introduction to capital budgeting. This chapter covers the calculation of net investment and the subsequent cash flows. Chapter 10 builds on the concepts of Chapter 9 by examining the different methods used to determine whether a capital budgeting project will create value. Such methods as net present value, internal rate of return, and payback are thoroughly explained. The appendix to this chapter provides an example of a capital budgeting project. Chapter 11 introduces the student to hotel valuation. The chapter begins with hotel market studies and also discusses the hotel appraisal process. The income capitalization approach is emphasized. Chapter 12 provides an introduction to capital structure. It shows the impact of capital structure on firm value and reviews some major capital structure theories. The text concludes with a glossary to help students become familiar with key terms. A variety of online tools and resources, for both instructors and students, enhance the text''s content. An Instructor''s Manual and Test Bank are provided through the www.prenhall.com catalog website -- password protected. A Student Companion Website, accessed at www.prenhall.com/chatfield, contains power point slides reinforcing the key points in each chapter and Excel spreadsheet templates for solutions of chapter problems where applicable. Excel supplemental products are available at a discounted price when packaged with this textbook (ISBN: 013-151681-7). Please consult with your local Pearson Prentice Hall sales representative for details.