Borders Hotel Corp. Case

847 Words Jan 30th, 2012 4 Pages
MIS 49F
ASSIGNMENT 2
BORDERS HOTEL CORP. CASE

SOLVED BY
Özgür İlker AĞIRMAN
Özlem ÖNCÜ

2012

TABLE OF CONTENT

BORDERS HOTEL CORP. 3 THE BHC PROJECT 3 Financing Alternatives: 3 FINANCIAL STATEMENTS 4 Balance Sheet 4 Earning Before Interest and Tax 5 Impact of Financing Options on Earnings 6 Balance Sheet – Year 1 7 EVALUATION OF ALTERNATIVES 8 Alternative 1 : 20-year mortgage 8 Alternative 2 : Common Stock Issue 8 Alternative 3 : Common Stock and Preferred Stock Issue 8 ALTERNATIVES FOR DANIELS’S INTEREST 9

BORDERS HOTEL CORP.

Karen Daniels , president of Borders Hotel Corporation (BHC) , has to investigate three financing alternatives in order to evaluate their impacts on viability of the BHC
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* Legal and other expenses were expected to be $125,000. 3. Preferred and common stock * Each unit consists of 3,000 preferred shares and 2,500 common shares. * The units would sell for $100,000. * Legal and other costs would be $125,000.

FINANCIAL STATEMENTS

Balance Sheet

Earning Before Interest and Tax

Impact of Financing Options on Earnings

Balance Sheet – Year 1

EVALUATION OF ALTERNATIVES

Alternative 1 : 20-year mortgage

Because of the fact that BHC is a new venture ; the risk is actually high. Mortgage rate appears to compensate for the risk.When BHC had acquired $2,275,000 with a mortgage.
When we look at the interest coverage between 75 percent occupancy and 50 percent occupancy of mortgage financing, it is possible to say that at 50% earnings do not cover the interest costs. Cash flows from operations (Earning before interest and tax plus depreciation) do not cover costs and principal repayments.
= = $1,982

In addition ; Break-even revenue with mortgage financing. If the breakeven sales were achieved, depreciation of $320,000 will not require a cash outflow and will cover the principal repayment of $180 , $160 for the furnishings and $49,000 for the mortgage in the first year.

Alternative 2 : Common Stock Issue

When we look at 75% occupancy, the rate of return (net earnings divided by amount invested) is $298,000/$3,525,000 = 8.4%. . This return should be regarded as low; as the

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