INVESTMENT STRUCTURE CASE STUDY 3
Investment Structure Case Study-JimSingh Hotel
Investment Structure Case Study-Jim Singh Hotel
Jim-Singh investment is arisk-averse company thus, hesitates to invest in any project if theydeem it risky. Primarily, the company has realized an increase in netoperational income since inception, which has been reducing in thethird and fourth year. Despite their additional investment in thethird year, the net operational income growth in the fourth yeardeclined to 3% having dropped from 5% in the third year. Undoubtedly,investments do not yield incomes immediately they are implemented andrequire some time for the project to generate income that latertranslates into profits. Moreover, the cash on cash returns was onthe uptrend but declined in the third year due to the $ 1millioninvestment project made by the company from 17% to 19 % and managedto attain an IRR of 17.5%.
The internal rate of return is aparameter used to measure the profitability of potential investments.Apparently, Jim Singh Hotel generated an internal rate of return of17.5%, which falls within their expectations thus, based on thisparameter, the project is profitable. On the other hand, equitymultiplier measures the financial leverage of a company whereby it isderived by dividing a firm’s total asset by whole net equity. JimSingh Company would like to achieve an equity multiple of two timesor greater on their investments but have only managed to attain 1.8times. Jim Singh Hotel relied on debt financing to raise its capitalat the inception stage. The hotel is still young and would probablysource the additional $5million to $7million capital infusion fromdebt. The company has a running debt facility, which they acquired toraise 65% of the purchase price. If the hotel was to continue, itwould be advisable for them to acquire the additional capitalrequired through other methods other than debts to avoidoverburdening the company with interest expenses. As a privatelyowned company, Jim Singh Hotel would not access capital from the saleof shares hence, it would have to raise the money from othersources.
Jim Singh Hotel is strategicallylocated and would attract investors particularly due to the proposeddevelopment of a new office building. As a result, the hotelclientele is expected to increase, as the building will house 5000government employees. Moreover, the NOI is expected to increasesignificantly thus, has a positive effect on the hotel’sprofitability. Nonetheless, the timeline of this project is unknowndue to the bureaucracy found in the government hence, it could takesome years to accomplish. Despite the uncertainty underlying theexpected development, Jim Singh Hotel should not accept theunsolicited offer of $100 million or the returns realized. The hotelhas not realized the benefits of the project undertaken in the thirdyear hence, it should hold on the asset waiting to reap the benefit.Besides, the anticipated development will enhance their profitabilityin the end.
Principally,in a bid to augment the additional capital infusion, the hotel shouldget another supply of resources other than debt. This will ensurethat the interest expense rate does not increase from the current oneof $ 2717813. What is more, the delta between the hotel’s currentand average daily rate, as well as government per diem rate is $30,which would boost the net operational income once the project isimplemented.
Number of rooms sold
Per Diem = ADR-5%