Bharat Hotels Company $($BHC$)$ is a major hotel chain of India with a century old history. The company operates $35$ hotels of which $14$ are owned by it and the rest are owned by others but managed by BHC$.$

BHC has had a significant innings spanning the last three decades both in India and overseas and has established itself as the premier hospitality body in this country. Indeed the BHC has spanned the length and breadth of the country, gracing important industrial towns and cities, beautiful beaches, hill stations, historical and pilgrim centres and wildlife destinations. Over the years, the BHC has won international acclaim for its quality hotels and its excellence in business facilities, services, cuisine and interiors. The BHC$$s operations covers over $60$ hotels in India and abroad, and encompass a number of brands across various price segments. The Company has a dominant position in most areas it is present in$.$ Providing world$-$class personalized service to guests while authentically reproducing the traditions and heritage of India has made the "BHARAT" brand a symbol of luxury and service the world over. The BHC is grouped into strategic business units to get consistency across the different units in the same brand and standardize the product and service across the brands, making them distinct and identifiable. These brands have been classified as Luxury, Business and Leisure.

BHC$\text{'}$s principal strategy has been to serve the high end of the international and leisure travel markets in major metropolises, secondary cities, and tourist destinations. It plans to continue to develop new business and leisure hotels to take advantage of the increasing demand that is emanating from the larger flow of commercial and tourist traffic of foreign as well as domestic travellers.

BHC believes that the unique nature of its properties and the emphasis on personal service distinguishes it from other hotels in the country. Its ability to forge management contracts for choice properties owned by others has given it the flexibility to swiftly move into new markets while avoiding the capital intensive and time consuming activity of constructing its hotels.

BHC$\text{'}$s major competitors in India are two other major Indian hotel chains and a host of others five star hotels which operate in the metropolises as an extension of multinational hotel chains. The foreign hotel majors are considerably stronger than the Indian hotels in terms of financial resources, but their presence in the country has historically been small.

THE INDUSTRY

The hExhibit $1$

BHC$\text{'}$s operating revenues and expenses for the year just concluded $($year $0)$

Rupees $($in million$)$

Operating Revenues

Room rent

$1043$

Food and beverages

$678$

Management fees for managed properties

$73$

Operating Expenses

Materials

$258$

Personnel

$258$

Upkeep and services

$400$

Sales and general administration

$400$

Exhibit $2$

BHC$\text{'}$s assets and liabilities at the end of year $0$

$($in million rupees$)$

Owner's Equity & Liability

Assets

Net worth

$1126$

Net Fixed Assets

$1510$

Debt

$900$

Gross Block : Accumulated depreciation

$2110$

$600$

Current Assets

$516$

$2026$

$2026$

BHC had no non$-$operating assets.Existing and Proposed Additions

At the end of year $0,$ BHC owned $2190$ rooms. It has planned the following additions for the next seven years. Most of the land needed by the company for these additions has been already acquired.

Year

Rooms

Investment $($in million rupees$)$

$1$

$90$

$200$

$2$

$130$

$300$

$3$

$80$

$240$

$4$

$130$

$500$

$5$

$186$

$800$

$6$

$355$

$1400$

$7$

$150$

$800$

You may assume

$$ All additions will take place at the beginning of the year.

$$ The occupancy rate will be $60$ per cent for year $1.$ Thereafter, it will increase by $1$ percent per year for the next six years

$$ The average room rent per day will be Rs$.2,500$ for year $1.$ It is expected to increase at the rate of $15$ percent per year till year $7.$

$$ Food and beverage revenues are expected to be $65$ percent of the room rent.

$$ Material expenses, personnel expenses, upkeep and services expenses, and sales and general administration expenses will be$,$ respectively, $15,15,18,$ and $18,$ percent of the revenues $($excluding the management fees$).$

$$ Working capital $($current assets$)$ investment is expected to be $30$ percent of the revenues.

$$ The management fees for the managed properties will be $7$ percent of room rent. The room rent from managed properties will be more or less equal to the room rent from owned properties.

$$ The depreciation is expected to be $7$ percent of the net fixed assets.

$$ Given the tax breaks it enjoys, the effective tax rate for BHC will be $20$ per cent.

$$ There will be no change in deferred taxes.

Other relevant Information

$$ The market value of equity of BHC at the end of year $0$ is Rs$.17100$ million. The imputed market value of debt is Rs$.900$ million.

$$ BHC$\text{'}$s stock has a beta of $0\mathrm{.}6775.$

$$ The risk$-$free rate of return is $6$ percent and the market risk premium $8$ percent.

$$ The post$-$tax cost of debt is $6\mathrm{.}4$ percent.

$$ The free cash flow is expected to grow at a rate of $4\mathrm{.}5$ per cent per annum after $7$ years