HOTEL FIMANCING TRENDS AND SCHEMES Concept Check A Bank to a Hotel The Williams Bennett Hotel Development Co. has identified a historie 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 buit in 1913. The fifteen-story buikling 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 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 quiring a return of 18% on their investment. The current business tax rate is 25%. project cost ($21,000,000) Because the structure is historic, the Williams Bennett Hotel Development Co. has been in discussions with the city gvenment to determine if there are any public incentives for redeveloping this property. The development company knows the hotel supply in Smithtonis underserved and that the city needs additional rooms to altract larger convention groups. The city would also gain from additional jobs, which would lower the unemployment rate. There are olvious benefits for both the City of Smithton and the Williams Bennett Hotel Develop- ment Co. QUESTIONS 1Calcubate the WACC and show stop-by-step cakculations for the woight of dobt, cost of dabt, tax offect 2Explain the tax offoct and its rolation to the interest portion of debt service In this casa, the city govonmont offored Willams Bennott a tax abatomont in the amount of $1,000,000, woightod cost of dobt, woight of oquity cost of oquity, and woightod cost of oquity What subsidos can tho govommont provido to the developmont compony? spmad evonly over the first fve yeans of operations. Explain how the tax abutoment impacts the company's ablity to pay debt servica. HOTEL FIMANCING TRENDS AND SCHEMES Concept Check A Bank to a Hotel The Williams Bennett Hotel Development Co. has identified a historie 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 buit in 1913. The fifteen-story buikling 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 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 quiring a return of 18% on their investment. The current business tax rate is 25%. project cost ($21,000,000) Because the structure is historic, the Williams Bennett Hotel Development Co. has been in discussions with the city gvenment to determine if there are any public incentives for redeveloping this property. The development company knows the hotel supply in Smithtonis underserved and that the city needs additional rooms to altract larger convention groups. The city would also gain from additional jobs, which would lower the unemployment rate. There are olvious benefits for both the City of Smithton and the Williams Bennett Hotel Develop- ment Co. QUESTIONS 1Calcubate the WACC and show stop-by-step cakculations for the woight of dobt, cost of dabt, tax offect 2Explain the tax offoct and its rolation to the interest portion of debt service In this casa, the city govonmont offored Willams Bennott a tax abatomont in the amount of $1,000,000, woightod cost of dobt, woight of oquity cost of oquity, and woightod cost of oquity What subsidos can tho govommont provido to the developmont compony? spmad evonly over the first fve yeans of operations. Explain how the tax abutoment impacts the company's ablity to pay debt servica
