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Lecture Hospitality financial management: Chapter 6 - DeFranco, Lattin

The sixth chapter covers financing growth. More specifically, authors discuss capital, basic debt terminology, types of loans, sources for loans, types of equity, sources of equity, hotel financing in the 1970s and 1980s and new hotel financing vehicles. | Chapter 6 Financing Growth Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Capital Types Costs Debt Terminology Loans Types Sources Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Equity Types Sources Hotel Financing in the 1970s and 1980s New Hotel Financing Vehicles Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Capital Defined Money, or the equivalent of money, that is loaned to, or invested in, a business Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Types of Capital Debt Fixed obligation or liability of the business that must be paid back, with interest, over a specified period of time. Equity Ownership in the business that does not require immediate repayment, but requires a return on the capital invested. Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Cost of Capital Cost of Debt Interest expense the borrower pays the lender Cost of Equity Portion of cash flow the sponsor of a deal allocates to the investor Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Weighted Average Cost of Capital or WACC Amount of interest expense and cash flow allotted to equity investors divided by the amount of capital Takes into consideration: Capital mix Tax effect Interest portion of debt service treated as an expense for tax purposes in the US Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved WACC Calculation WACC = wd kd (1-T) + we ke Weight of debt = wd Cost of debt = kd (1-T) Tax rate of business = T Tax effect = (1-T) Weighted cost of debt = wd kd (1-T) Weight of equity = we Cost of equity = ke Weighted cost of equity = we ke Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved WACC Calculation Example Weight of debt = 0.4 Cost of debt = 10% (1-0.2) Tax rate of business = 0.2 Tax effect = 0.8 Weighted cost of debt = (0.4)(10%)(0.8) Weight of equity = 0.6 Cost of equity = 20% Weighted cost of equity = (0.6)(20%) WACC = | Chapter 6 Financing Growth Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Capital Types Costs Debt Terminology Loans Types Sources Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Equity Types Sources Hotel Financing in the 1970s and 1980s New Hotel Financing Vehicles Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Capital Defined Money, or the equivalent of money, that is loaned to, or invested in, a business Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Types of Capital Debt Fixed obligation or liability of the business that must be paid back, with interest, over a specified period of time. Equity Ownership in the business that does not require immediate repayment, but requires a return on the capital invested. Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Cost of Capital Cost of Debt Interest expense the borrower pays the lender Cost of Equity Portion of cash flow .