I am thinking about going into the hotel business through acquiring 12 hotels spread throughout the Rocky Mountain region. I have projected out the costs of hiring managers to run the hotels, as well as the other many costs of operating them. Based on this, I have a good handle on the cash flows the project will generate, and I now need to estimate the cost of equity I will use to discount these cash flows.

Unfortunately, I am out of time, and so I need you, my brilliant financial protege, to give me an estimate of a reasonable cost of equity for this project. Obviously, I don't have the 10 million needed to acquire the hotels myself and will need to attract additional equity financing from outside investors. So when I meet with these investors, I need a logical estimate and explanation for what the cost of equity is that they should be earning. So don't just give me a number, you have to tell me why you pick what you do.

Obviously, they could invest in many other hotel chains and management companies, many of which are publicly traded. So your best approach is to look at the cost of equity for these pure-plays (the ticker for Hilton is HLT, but I would rely on estimates from more than one company so look up their competitors) and make adjustments based on our situation. For instance, consider the following differences:

Are your pure-play firms more or less risky based on geographic dispersion relative to us?

Are your pure-play firms more or less risky based on easier access to additional capital?

Am I or these pure-plays more likely to achieve operating efficiency (higher profit margins) over the next four or five years?

There are certainly other considerations you might come up with that I am missing right now, so feel free to include them as well. But make adjustments to your estimates to fit my situation. Then write up your conclusions in a professional sounding report that is no longer than one page. Put any additional tables in an appendix.

(The 12 hotels are not relevant. They only give you the industry that you are researching. If you want to value a company, you have to figure out what companies in that same industry are selling for, or what kind of discount rate investors expect for firms in that industry. So you have to look at other firms in the same industry. So you will look up hotel firms, and calculate their cost of equity. And then you will make adjustments to their costs based on the subject firm with 12 hotels. So think about this logically. Would you rather invest in Hilton, with thousands of hotels, or this company with 12? Which is less risky? Which has more growth potential? These are the kinds of issues you would think about when estimating the cost of equity using the pure play approach. But no, this is not based on an actual firm, so there won't be stuff on the internet about it. )

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 21 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $210 for a night. The basic unit of operation is the "night," which is one room occupied for one night. The operating income for year 1 is as follows: HomeSuites Operating Income Year 1 Sales revenue Lodging $ 138,060,000 Food & beverage 39,091,500 Miscellaneous 11,497,500 Total revenues $ 188,649,000 Costs Labor $ 79,873,500 Food & beverage 22,995,000 Miscellaneous 13,797,000 Management 2,509,000 Utilities, etc. 37,800,000 Depreciation 10,500,000 Marketing 16,500,000 Other costs 3,250,000 Total costs $ 187,224,500 Operating profit $ 1,424,500 In year 1, the average fixed labor cost was $409,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm. At the beginning of year 2, HomeSuites will open four new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 75 percent. Management has made the following additional assumptions for year 2: The average room rate will increase by 5 percent. Food and beverage revenues per night are expected to decline by 20 percent with no change in the cost. The labor cost (both the fixed per property and variable portion) is not expected to change. The miscellaneous cost for the room is expected to increase by 25 percent, with no change in the miscellaneous revenues per room. Utilities and depreciation costs (per property) are forecast to remain unchanged. Management costs will increase by 8 percent, and marketing costs will increase by 10 percent. Other costs are not expected to change. The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy ("High Price"), they will work to maintain an average price of $261 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 65.0 percent with this strategy. Under the alternative strategy ("High Occupancy"), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $174, they can achieve an occupancy rate of 85 percent. The current estimated profit is $139,623,405. Required: a. Prepare the budgeted income statement for year 2 if the "High Price" strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.) Home Suites Operating Income Year 2 Sales Revenue Lodging Food & Bev. MISC Total Revenues Costs Labor Food & Bev. MISC Management Utilities, ECT Depreciation Marketing Other Costs Total Costs Operating Profit b. Prepare the budgeted income statement for year 2 if the "High Occupancy" strategy is adopted. Home Suites Operating Income Year 2 Sales Revenue Lodging Food & Bev. MISC Total Revenues Costs Labor Food & Bev. MISC Management Utilities, ECT Depreciation Marketing Other Costs Total Costs Operating Profit

HomeSuites is a chain of all-suite, extended-stay hotel properties. The chain has 21 properties with an average of 200 rooms in each property. In year 1, the occupancy rate (the number of rooms filled divided by the number of rooms available) was 75 percent, based on a 365-day year. The average room rate was $210 for a night. The basic unit of operation is the "night," which is one room occupied for one night.

The operating income for year 1 is as follows:

HomeSuites Operating Income Year 1 Sales revenue Lodging $ 138,060,000 Food & beverage 39,091,500 Miscellaneous 11,497,500 Total revenues $ 188,649,000 Costs Labor $ 79,873,500 Food & beverage 22,995,000 Miscellaneous 13,797,000 Management 2,509,000 Utilities, etc. 37,800,000 Depreciation 10,500,000 Marketing 16,500,000 Other costs 3,250,000 Total costs $ 187,224,500 Operating profit $ 1,424,500

In year 1, the average fixed labor cost was $409,000 per property. The remaining labor cost was variable with respect to the number of nights. Food and beverage cost and miscellaneous cost are all variable with respect to the number of nights. Utilities and depreciation are fixed for each property. The remaining costs (management, marketing, and other costs) are fixed for the firm.

At the beginning of year 2, HomeSuites will open four new properties with no change in the average number of rooms per property. The occupancy rate is expected to remain at 75 percent. Management has made the following additional assumptions for year 2:

The average room rate will increase by 5 percent.

Food and beverage revenues per night are expected to decline by 20 percent with no change in the cost.

The labor cost (both the fixed per property and variable portion) is not expected to change.

The miscellaneous cost for the room is expected to increase by 25 percent, with no change in the miscellaneous revenues per room.

Utilities and depreciation costs (per property) are forecast to remain unchanged.

Management costs will increase by 8 percent, and marketing costs will increase by 10 percent.

Other costs are not expected to change.

The managers of HomeSuites are considering different pricing strategies for year 2. Under the first strategy ("High Price"), they will work to maintain an average price of $261 per night. They realize that this will reduce demand and estimate that the occupancy rate will fall to 65.0 percent with this strategy. Under the alternative strategy ("High Occupancy"), they will work to increase the occupancy rate by lowering the average price. They estimate that with an average nightly rate of $174, they can achieve an occupancy rate of 85 percent. The current estimated profit is $139,623,405.

Required:

a. Prepare the budgeted income statement for year 2 if the "High Price" strategy is adopted. (Round your per unit average cost calculations to 2 decimal places.)

Home Suites

Operating Income

Year 2

Sales Revenue

Lodging

Food & Bev.

MISC

Total Revenues

Costs

Labor

Food & Bev.

MISC

Management

Utilities, ECT

Depreciation

Marketing

Other Costs

Total Costs

Operating Profit

b. Prepare the budgeted income statement for year 2 if the "High Occupancy" strategy is adopted.

Home Suites

Operating Income

Year 2

Sales Revenue

Lodging

Food & Bev.

MISC

Total Revenues

Costs

Labor

Food & Bev.

MISC

Management

Utilities, ECT

Depreciation

Marketing

Other Costs

Total Costs

Operating Profit

Project A has a total present value of future cash flows of $98,200 and a cost of $102,000. Project B has a total present value of future cash flows of $386,911 and a cost of $287,211. Project C has a total present value of future cash flows of $784,000 and a cost of $668,000. Project D has a total present value of future cash flows of $119,865 and a cost of $98,770. Which of these projects has the highest Profitability Index?

1. Consider a firm whose total cost function is q³ – 6q² + 13q.
   1. If the price of a unit of output is $13, what is the profit-maximizing value of q?
   2. Find the average cost function of the firm? What is the firm’s minimum average cost?
   3. What is the equilibrium price of output? How much does each firm produce at equilibrium price? What is each firm’s profit at the equilibrium price?

Average total cost is important to a business because

Multiple Choice

a) It tells the firm what the profit per unit produced is.

b) It always declines as more output is produced.

c) It tells the firm what its fixed costs are.

d) It is an indicator of the production function.

What is the estimated total cost of the crisis in each of these three countries?USA, UK, and Germany State clearly the source of the estimates. What factors explain most of the total cost of the crisis in each of the countries??

1. Suppose that there is “dominant” firm with total cost function of c(q) = 100 + 10q + 0.25q². It faces a market demand function (inverse) of p = 100 − 0.5Q, where Q indicates total market supply. This dominant firm has to deal with 10 fringe firms, each of whom behaves perfectly competitively. Each fringe firm has a marginal cost function dc(q)/dq = 20q + 25

   a) Calculate the supply function of the fringe firms
   b) Using this, calculate the residual demand function of the dominant firm.
   c) Derive the marginal revenue function of the dominant firm.
   d) Find the profit-maximizing price of the dominant firm.
   e) How much does the competitive fringe supply to the market?

The demand for a monopolist’s product is: P = 40 -2Q; the monopolist’s total cost function is: TC = 8Q + 0.5Q^2.(a)Under free monopoly, what is the numerical value of the dead-weight loss (DWL)? (b) Compute the monopolist’s break-even points and graph in the same diagram, demand (D), marginal revenue (MR), marginal cost (MC) and average cost (AC); in diagrams directly below, graph total revenue (TR), total cost (TC) and profit (pi).(c) Under short-run regulation, what are the market gains?