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Concept Check A Bank to a Hotel The Williams Bennett Hotel Development Co. has identified a historic bank building that could be converted into a

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Concept Check A Bank to a Hotel The Williams Bennett Hotel Development Co. has identified a historic bank building that could be converted into a hotel. The location is in the heart of downtown Smithton, a densely popu- lated metropolitan city. The structure was designed by an acclaimed architect and built in 1913. The fifteen-story building will be transformed into a chic boutique hotel with the hotel lobby, meeting rooms, caf, and fitness area on the first two floors. The remaining thirteen floors will contain 130 guest rooms. The entire project will cost $35,000,000. Sixty percent of the project cost ($21,000,000) will be financed through debt, and $14,000,000 is being provided by equity investors. The lender is offering a favorable 12% interest rate on the $21,000,000, and the equity investors are re- quiring a return of 18% on their investment. The current business tax rate is 25%. Because the structure is historic, the Williams Bennett Hotel Development Co. has been in discussions with the city government to determine if there are any public incentives for redeveloping this property. The development company knows the hotel supply in Smithton is underserved and that the city needs additional rooms to attract larger convention groups. The city would also gain from additional jobs, which would lower the unemployment rate. There are obvious benefits for both the City of Smithton and the Williams Bennett Hotel Develop- ment Co. 5TTUNS 1. 2. 3. 4. 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 the company's ability to pay debt service. STTUNS 1. 2. 3. 4. 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 the company's ability to pay debt service

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