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business
management in the hospitality industry

Questions and Answers of Management In The Hospitality Industry

Identify and explain the keys to successful loan negotiations.
Identify and explain the keys to successful equity negotiations.
Identify and explain other negotiating skills.
Determine if there is an opportunity for a carried interest.Because you already know that the net present value of the project is positive, you know there is a possibility of carried interest. To
Estimate how much of carried interest the sponsor of the new venture could carve out for himself.If the equity investor requires a 15% return on her investment, then the sponsor of the deal could
Explain how an S-corporation and a limited liability company can be formed. What are their restrictions and characteristics?
What are personal loan guarantees and additional collateral? How can they be avoided?
If a lender asks for 2 points on a loan that has a principal of $250,000, what does this mean?How does it impact the effective interest rate on the loan?
What is sweat equity, and how can the sponsor of a deal convince his equity investor he deserves some when negotiating an equity investment agreement?
Identify and explain the four key issues that equity investors focus on during a negotiation.
A five-year loan for $500,000 with a 10% interest rate requires that 3 points be paid up front. What is the effective interest rate of this loan?
If the loan in exercise 6 requires that 5 points be paid up front, what would the new effective interest rate be?
What are the four basic goals a borrower should set when negotiating with a lender?
ETHICS ✶ While negotiating a loan, Christian is hitting some roadblocks. The lender wants to charge him 5 points on the loan and asks him for a personal guarantee and additional collateral.
EXPLORING THE WEB ✶Visit www.governmentguide.com and look under the heading‘‘Small Business.’’ Identify at least two sources from which a small business can obtain a business loan.
Identify and explain the positive and negative aspects of the proposed business entity for Fergus and Freya.
Calculate the IRR for this project based on a sale in Year 6 with a 10% cap rate.
Analyze the structure of the equity proposal. If you were Fergus and Freya, would you accept this offer as it stands? If not, what would you negotiate?
Calculate the amount of the loan from Star Bank, payment amount, and effective interest rate.
Calculate the amount of the loan from Prize Bank, payment amount, and effective interest rate.
Analyze the terms offered by both banks. If you were Dean Hotel Investments, what terms would you negotiate, and why?
Calculate the net present value of the project. (For calculations, refer to Illustration 11-4 and the endof-chapter Finance In Action case study.)
Estimate how much of a carried interest the sponsor of the new venture could carve out for herself.
Understand how to finance the growth of a company.
Become familiar with the two types of capital: debt and equity.
Understand the cost of debt and equity.
Learn how to determine the best mix of capital for a company.
Understand the concept of weighted cost of capital (WACC) and how to calculate it.
Define financial leverage and understand how it can increase ROI.
Identify the types of debt and equity and their sources.
Determine how restaurant financing parameters differ from hotel parameters.
Learn how hotels were financed during the 1970s and 1980s.
Identify the latest schemes to finance hotels.
Calculate the return on investment if Mr. Cruz funds the project entirely with equity.$70,000 of cash flow divided by $410,000 of equity ROI of 17.1%
Calculate the ROI if a combination of debt and equity is utilized.$70,000 of gross cash flow less $28,115 of debt service $41,855 of net cash flow$41,855 of net cash flow divided by $200,000 of
Should Mr. Cruz maximize the amount of debt or equity used in this project? Why?Mr. Cruz should maximize the amount of debt for this project. Based on the ROI calculations, it is evident that Mr.
What type of loan has a five-year term but payments based on a twenty-year repayment schedule?What would Mr. Cruz’s options be after the five-year term has ended?The loan described in this case is
Sarah Scott borrowed $200,000 from a bank to start a catering business and has agreed to pay the bank $15,000 per year in interest expense. What is the cost of debt for Sarah?
If Sarah raises another $100,000 of equity from her sister Allison, agrees to give her a 25%ownership position in her catering business, and projects annual cash flow before debt to be $50,000, what
What is the weight of debt for Sarah’s catering business?
What is the weight of equity for Sarah’s catering business?
If Sarah’s business falls in the 30% tax bracket, what is her cost of debt after tax?
What is the weighted average cost of capital for Sarah?
Define business loans, permanent loans, and mezzanine loans.
What sources can provide convertible loans and mini-perms?
Compare and contrast venture capital and SBICs.
ETHICS ✶ To qualify for financial assistance from the SBA, Jim realizes his application must have positive credit merits. One of the criteria is the relationship between the business’s debt and
EXPLORING THE WEB ✶ Using the Small Business Administration website(www.sba.gov), research the options of the SBA 7(a) program and the Certified Development Company (504) programs.
Besides cash, what are three forms of financing that lenders often consider as equity when making a loan? Explain.
Identify and describe the three major forms of government subsidies that can be viewed by lenders as equity.
What is a REIT? What are the two major classifications of REITs?
What type of equity financing is prevalent in restaurant projects, especially in major cities?
Name and describe three sources of equity financing.
Explain why venture capitalists prefer investing in equity rather than debt.
Explain the role of construction and management companies in providing equity capital in the hospitality industry.
ETHICS ✶ Patrick Clark is a young entrepreneur who wants to open a restaurant in San Francisco, California. Because real estate prices are very high, he is not able to secure enough equity to
EXPLORING THE WEB ✶ Using the Hotel-Online website (www.hotel-online.com), search for five recent hotel development articles and comment on how the debt and equity components were arranged. Besides
Calculate the WACC and show step-by-step calculations for the weight of debt, cost of debt, tax effect, weighted cost of debt, weight of equity, cost of equity, and weighted cost of equity.
Explain the tax effect and its relation to the interest portion of debt service.
What subsidies can the government provide to the development company?
In this case, the city government offered Williams Bennett a tax abatement in the amount of $1,000,000, spread evenly over the first five years of operations. Explain how the tax abatement impacts
Calculate the total project cost for this mixed-use development from the information provided.
If lenders are willing to provide 55% of the project cost in the form of debt, calculate the dollar amount of debt and equity that Frank Douglas must raise.
What sources of loans are available to Mr. Douglas? What sources of equity are available? Which sources of loans and equity are the best options for this development, and why?
Review the importance of accounting as the language of business and realize the value of the financial statements and management reports hospitality managers utilize.
Review the principles of accounting and the various systems of accounts used in the hospitality industry.
Describe the three basic financial statements—balance sheet, income statement, and statement of cash flow—and their usefulness to management.
Understand how hospitality managers use managerial reports to monitor and control key expenses and gauge the success of a hospitality business.
Manuel is a good negotiator and is able to persuade the seller to give him a discount on the furniture for the lobby lounge of his hotel for $82,000 rather than the list price of$100,000. If he
Juan is a meticulous accountant and wants to make sure everything is allocated correctly in its own line item or account. However, he also observes GAAP. According to which principle would he not use
Identify the three sections of the Statement of Cash Flow and give at least one example of cash inflow and one example of cash outflow for each of the three sections.
Explain why depreciation expense should be added back when compiling the statement of cash flow. If there is an amortization expense account, how would you treat it?
If beverage inventory increases from $150,000 on December 31, 2008, to $165,000 on December 31, 2009, will this constitute a cash inflow or cash outflow for W.S. Sports Bar in its cash flow from
Gabi’s Grill purchased a new ice machine in March. In Gabi’s cash flow statement for that month, is this a cash inflow or outflow, and in which section of the statement of cash flow will the
Consider the following aging table. What will be Christian Catering’s total estimated bad debts?Christian Catering Customer Current Number of Days 1–30 31–60 61–90 Over 90 M. Saryee 100 100
Discuss the advantages and disadvantages of adopting the CP3 system for an independent restaurant and a country club.
ETHICS ✶ Esther knows from her accounting classes that revenues must be recognized only when they are earned. However, her boss wants to show that the theme park is doing well in June and asks
EXPLORING THE WEB ✶ Visit the web page for the Securities and Exchange Commission at www.sec.gov. This is a valuable tool for students to access financial information for public companies. Select a
Do there appear to be any abnormalities with the report? Look for any items that seem unusual, such as item food cost.
Analyze the report. Which items have the highest contribution margin? Which items have the lowest contribution margin?
What advice can you provide to the restaurant manager for improving the restaurant’s sales mix?
Calculate the labor cost per unit for November 20 and the month-to-date labor cost per unit, and then total each column. (Fill in the gray shaded areas in the daily payroll report provided.)
Analyze the daily payroll report, noting any major departures from the budgeted amounts.
If you were the general manager for this property, what actions would you take and why?
Interpret and analyze financial statements using vertical, horizontal, trend, and ratio analyses.
Use financial analysis methods to determine the financial health of a business and quantify its upside potential.
Apply financial analysis skills to scheduling, pricing, revenue management, profit flexing, and costvolume-profit decisions.
Learn how unethical companies can manipulate financial statements to mislead readers.
When conducting a horizontal analysis, what numbers do you need to calculate?As seen in the shaded regions of the completed horizontal analysis for the Boatman Hotel, the change in dollar amounts and
First, determine if there were any major changes between the two reporting periods.The easiest way to identify major changes is to look at the percent change column. By looking at each line item, you
The next step is to analyze the data and put meaning to the numbers.■ In the previous answer, we noted a significant increase in rooms revenue (13.29%), which was matched with an increase in rooms
Perform a vertical analysis of the T Resort’s 2008 income statement.
Perform a vertical analysis of the T Resort’s December 31, 2007, balance sheet.
Perform a vertical analysis of the T Resort’s December 31, 2008, balance sheet.
Perform a horizontal analysis of the T Resort’s 2007 and 2008 balance sheets.
Is the T Resort too heavily in debt? How can you evaluate its debt structure?
What is the projected current ratio for the T Resort as of December 31, 2007, and 2008?Are the ratios favorable?
What are the projected profit margin, and return on equity for The T in 2008?
What will be the inventory turnover rate for The T in 2008?
ETHICS ✶ Macy, a friend of yours, started a small restaurant five years ago. She was doing well until last year. She is looking into selling the restaurant and would like your opinion on how she

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