Financial Management questionsPlease thoroughly answer those questions on answer sheet that I provide.Answer format is followed as ‘FM Final Assignment Answer Sheet.doc’.
Financial Management in Hospitality
Part A – Case Study (100%)
Question 1
Activision Blizzard is an American Company headquartered in Santa Monica, California. It is listed in NASDAQ and traded in USD under the stock code ATVI. The company is in the Electronic Gaming & Multimedia industry, developing and distributing content and services on video game consoles, personal computers, and mobile devices all over the world. The company’s key product franchise includes Call of Duty, World of Warcraft, Diablo, Candy Crush, and Hearthstone. These games and many others, are enjoyed by people of all ages during their leisure and recreational time.
Below is the breakdown of ROE based on semi-annual data provided by Activision Blizzard.
Date
ROE =
Net Income x Revenues
Revenues x Total Assets
Total Assets Total Equity
Jun 30, 2020
13.25%
25.94%
0.35
1.48
Dec 31, 2019
11.74%
23.16%
0.33
1.55
Jun 30, 2019
14.08%
23.70%
0.41
1.46
Dec 31, 2018
15.96%
24.17%
0.42
1.57
Part a. Suppose there were no substantial changes in the debt and equity accounts. For each of the three ratios, comment on how they are contributing to the changes in ROE. Explain what these changes mean for the company, and whether it makes sense for a company operating in leisure and entertainment.
Part b. What is your estimation of the current demand for these leisure activities, and your view on the value creating ability of Activision Blizzard for the next half a year (until 30 Jun 2021)? Elaborate.
Question 2
InterContinental Hotels Group operates 18 hotel brands across the midscale through luxury segments. They include: Holiday Inn, Hotel Indigo, Avid, Klimpton, and others. The dividend yield trailing twelve months is 0.784%, and it’s current market price per share is USD $50.89. InterContinental Hotels Group’s year to date return is -25.89%.
date
Price per share (USD $)
Dividend per share (USD $)
2019 Dec
68.87
1.18
2018 Dec
56.82
1.1295
2017 Dec
67.17
1.0292
2016 Dec
50.24
1.0884
2015 Dec
50.65
1.0488
2014 Dec
53.08
0.9735
Part a. Calculate according to the Constant Growth Model, InterContinental’s growth rate using the provided historical data.
Part b. Suppose IHG is expected to grow at the rate calculated in Part a. for 3 more years, and thereafter, grow at a rate of 5% for the foreseeable future. What is the current value of IHG common stock to an investor who is able to earn 5.8% from investments with a similar level of risk? The beta of IHG is 0.92.
Question 3
A corporation would like to recapitalize it’s capital structure by issuing a bond. Bonds from this corporation had been rated as BBB+. Which one of the following bond issues poses the least risk to the issuer corporation? Explain your answer in detail.
Bond
Currency
Issue Volume
Issue Price
Denomination
Coupon
Maturity Date
A
USD
750,000,000.00
99.98
$1,000
3.8750%
28/2/2027
B
USD
500,000,000.00
99.41
$1,000
3.1250%
13/3/2025
C
USD
1,500,000,000.00
99.59
$1,000
5.5500%
13/1/2026
Question 4
Events Expert Corp. is planning to acquire a new participant tracking system for a cost of $108,000. Management has already paid a consultant firm of $15,000 to recommend the best tender option out of all the possible options. The delivery and installation costs are expected to be $1,900 and $400, respectively. The monthly fees associated with the system is $960, while the annual maintenance fee is $680. Financing costs are $3,000 per year. The new system will depreciate using an 3-year MACRS schedule, provided below. The tracking system is expected to stay relevant and useful for 5 years. The management team expects this new system to be non-transferrable at the end of the project life, but the tender company will return the deposit fee of $3,000 that was paid during the purchase of the system.
Year
3-year MACRS
1
33.33%
2
44.45%
3
14.81%
4
7.41%
Events Expert Corp expects the acquisition to reduce costs of each event by $4,800, and they usually have around 6 events per year. This is because they will be able to reduce the number of staff hired to control each event. It will also keep the company up-to-date in terms of the available technology among event management peers, and be able to get contracts for three additional events per year, which could increase revenues by $64,000. The tender company will provide three training sessions at an additional cost of $2,000 each, and all full-time event managers must attend before the system is used. The marginal tax rate is 20%.
Currently Events Expert Corp has 20,000 zero coupon bonds with 10 years to maturity, that sold for 40% of the par value, 1,500,000 share of common stock, selling for $18 per share, with a beta of 1.3. Market risk premium is 6.50%, and the risk-free rate is 1.25%. The tracking system project is a little bit less risky than the company’s usual projects, so an adjusted factor of -1.8% will be applied to the cost of capital.
Part a. Compute all cash flows for this capital budgeting project.
Part b. What is the NPV of the project and should the project be accepted or not?
Part c. Comment on the reliability your answer in part b. What three of the possible steps that corporations can take to reduce uncertainty of the capital budgeting decision?
—————————————–End of Paper —————————————-
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