MSC2835 - Hospitality and Corporate Finance Assignment

Assignment Task

Introduction

A few years after your graduation from Glion and some experience working in a 5-star hotel chain, you are ready for the next stage in your career, namely purchasing a hotel in Munich, Germany.

You have found two hotels that are possibly for sale. The first one is a 150-room midscale hotel, with limited services. The second one is a 75-room upscale boutique hotel, with a 45-seat restaurant that serves breakfast, lunch and dinner; it also has a bar which seats up to 20.

You are planning on replacing both FF&E and wall coverings there as soon as the acquisition is completed. The renovation would cost 13% to 15% of the hotel acquisition cost. Operations would start likely at the beginning of next year.

Financing

You have been planning for this and have both saved money and guaranteed some equity investment from family. This will represent 20% to 40% of the total cost, with the remainder coming from debt.

You will estimate the rate of return shareholders require, using the CAPM.

For the commercial real estate loans, you have been in contact with a few classmates who are now working in various banks. You were told to expect a 3% to 5% premium over the country’s 10-year sovereign bond yields. That will depend on how much capital (in %) will be originating from equity, on the current economic conditions and future forecasts and on whether you purchase a midscale or an upscale hotel, among others.

Your task

For each of the hotel properties, you are required to:

• Estimate the WACC.
• Prepare Cash Flow for the next ten years.
• Apply Payback, NPV, and IRR capital budgeting techniques to decide which property to acquire.

Assumptions

• Both hotels are operating at the average occupancy and ADR of similar hotels in the area. You hope to convince the current owners of each hotel to sell them for a price estimated using a room-rate multiplier: Acquisition cost = ADR x Number of Rooms x 1000, where you would estimate current year’s ADR using last year average, adjusted by inflation.
• FF&E renovation would cost 13% to 15% of the hotel acquisition cost (need to justify why your estimate is on the lower or higher range).
• The acquisition cost is not depreciated, but the additional FFE investment will be depreciated, either straight-line over 7 years.
•  In addition to the acquisition cost, you have to account for preopening costs which amount to about 0.5% of the acquisition cost.
• For the upscale hotel providing F&B, working capital is estimated as 3% of the following year’s estimated total revenue. An adjustment to that percentage needs to be made for the midscale hotel (you need to make an educated guess and justify)
• The cost of debt will be estimated as a premium of 3% to 5?ove 10-year government bonds.
• The cost of equity should be estimated using the cost of equity of comparable companies (hotel chains).
• The Terminal Value (TV) after 10 years of operation will be estimated as follows, using a terminal capitalization rate for the area of 8.0%. Furthermore, you have to consider exit costs (brokerage commission and other fees) of 2% of terminal value

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