Financing Options

Option 1

Option 1 utilizes 100% debt. The JSL group would take out a private loan in the amount of $35 million (or 48% of the total cost) at 6% interest. The city would back the remaining $37 million (that is, 52% of the total cost) by issuing bonds at 3.75% interest. This would be partially backed with general obligation bonds from San Marcos residents (which still requires voter approval), and partially with revenue from the facility itself. The annual debt payment on this form of financing (interest + principal) is $5,314,176.00.

Option 2

Option 2 utilizes 60% city-backed debt at 4.25% interest. This would be paid back through a visitor tax increase on hotels and rental cars, as well as revenue from the facility itself. This tax increase does not require voter approval. The remaining 40% would be offered to preferred limited stockholders. This preferred stock would be offered at $45/share. The dividend expected would be $5 per share and the flotation cost is an inexpensive $1.50 per share. The annual debt payment on this form of financing (interest + principal) is $3,180, 526.00.

Option 3

Option 3 utilizes a mix of private loans and public ownership of the facility. In this option, JSL owns 25% of the facility through a limited private stock offering to its internal partners. This would be offered at $43/share, with a $3 dividend and $2 flotation cost. Then, JSL finances an additional 30% through private bank loans (so that its total controlling share is 55%). These loans are issued at 6%. The final 45% of the facility will be offered as common stock to the residents of San Marcos, then surrounding communities. This stock will sell for $20/share with a $2 dividend, $2 flotation cost, and 1.5% growth rate. The annual debt payment on this form of financing (interest + principal) is $2,275,482.00.

Use the Time Value of Money Table (or financial calculator) to calculate the NPV for each of the financing options. Use the WACC for each option as the discount rate for that option.