Jenny informs you that the Board will be discussing the potential acquisition of a hotel, CC Inc. She provides you with her notes pertaining to this potential acquisition (Exhibit 1) and excerpts from the financial statements of CC (Exhibit II). She asks you to use this information and prepare an analysis of this potential acquisition.

Controllers Notes Pertaining To The Potential Acquisition Of The CC Hotel

Background Information

ABC is interested in purchasing a hotel property located in Muskoka, Ontario, CC Hotel. George and Penny privately own this hotel property. Their asking price is $14 million for all of the shares of CC Hotel.

CC is an extremely popular destination for Canadian and international travelers. The hotel is usually fully booked from June through October. Guests usually make reservations months in advance of their stay. During the peak season for 2016, the average room was $175 per night. During the off-peak season, the hotel is not usually fully booked. However, for the month of April 2016 the hotel was fully booked because of special events which resulted in $50,000 more revenue than normally earned.

Mack Wedding

In June 2016, CC hosted the wedding and wedding reception of the daughter of a well-known actor, Mack. Mack booked every room in the hotel for three nights which provided CC with revenue of $210,000. Mack also paid a $200,000 fee to have the hotel close its golf course and hotel facilities to the public for the three day period which extended over a weekend. The golf course and pro shop would otherwise have generated revenue in the amount of $90,000. The George and Penny were surprised to receive an additional $500,000 payment from Mack to thank them for their successful efforts in keeping the wedding details private. All of the amounts received for this wedding are included in reservation revenue on the income statement.

Golf Tournament

CC hosted a high profile, national tournament for golfers in May 2016 and the fee received by CC for hosting this tournament was $750,000. CC had to close the golf course to the public for seven days which resulted in lost revenue of $170,000. Each year, the tournament organizers seek out a different site to host the tournament. Several elite Canadian golf courses have hosted this tournament. To facilitate player and supporter accommodations, the golf courses for this tournament are usually affiliated with a large resort hotel, such as CC. With its 400 guest rooms and its quality golf course, CC met the requirements of the tournament organizers. The fee is included in golf fees and pro shop revenue on the income statement.

Personal Expenses

George and Penny use CC to pay their personal expenses rather than taking a salary. During fiscal 2016, personal expenses paid by CC include:

The purchase of a new sports car for Penny that cost $100,000,

Travel costs in the amount of $225,000 to various exclusive resorts in Hawaii, Tahiti and South Africa during the winter months of 2016. George claims that is the best way to research new trends in the industry, and

An additional $420,000 in other personal expenses. These expenditures are included in hotel operating costs on the income statement.

As George and Penny use the funds freely for personal use, they do not pay themselves a regular salary.

Land and Investments

CC purchased 300 acres of land at a cost of $1,000,000. CC was built on 200 acres of this land. The separate 100 acre parcel of land is undeveloped. The undeveloped land, which is located 40 kilometers from CC is estimated to be presently worth $3,000,000.

The special payment of $500,000 received by CC from Mack along with $500,000 of additional funds was invested in July 2016 in interest-bearing and equity investments. These investments have earned $25,000 in interest and dividends which are included in investment revenue on the income statement. The market values of the investments are unchanged from their costs as at December 31, 2016.

Valuation

As the 2016 annual net income is likely to be representative of future earnings, and the resort is not a capitalintensive business, ABC would like to value the company using a capitalized earnings approach. Jenny recently read in a trade journal that similar property investments yield a 20% return. She does not see any reason why this investment in CC would be any different.

Required:

1. Prepare a memo outlining the opportunities and risks of the potential acquisition

Excerpts From The Income Statement Excerpts From The Balance Sheet As at December 31 (in thousands of dollars) For the years ended December 31 in thousands of dollars) 2016 2015 2016 2015 unaudited 16,710 Reservations Golf fees and Investment income Cash $ 453 142 270 12 877 $ 162 130 140 6,060 4,485 Accounts receivable Total revenue 22,795 Prepaid expenses 435 Expenses Hotel operations, including amortization Golf course operations, including amortization Wages and salaries 8,87 810 6,67 16,355 10,670 Property, plant and equipment (net) 16,657 15,465 Invest ments 7,200 Total expenses 18,865 $18,534 Income before income tax 3,930 2,43 iabilities Bank Accounts payable and accrued liabilities loan $ 90 Income tax 1,305 225 166 315 Net income 2,625 51,6 Long-term debt 475 466 Common shares 100 Retained earnings $18,534 $15