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Copyright, ii
Brief Biographies, xiii
Preface, xv
1. Introduction to Canadian Hospitality Financial Management, 1
Chapter Objectives, 1
1.1. Introduction, 1
1.2. The Relationship of Financial Management to Other Functional Areas of Management, 2
1.3. Organization of the Firm, 3
1.4. A Basic Understanding of Financial Management, 6
1.5. Wealth Maximization, 8
1.5.1. Different Individuals, Differing Objectives, 9
1.5.2. Taking Actions to Increase Value, 10
1.5.3. Undertaking Projects to Create Value, 11
1.6. A General Outline of the Textbook, 12
1.7. Summary, 13
Key Terms, 14
Discussion Questions, 14
2. Fundamental Principles of Financial Management, 15
Chapter Objectives, 15
2.1. Introduction to the Fundamental Principles of Financial Management, 15
2.2. Internally Generated Funds, 16
2.3. Equity Financing, 18
2.4. Debt Financing, 19
2.5. How Internally Generated Funds, Equity, and Debt Work Together, 20
2.6. Summary, 21
Key Terms, 21
Discussion Questions, 22
3. The Canadian Financial Environment, 23
Chapter Objectives, 23
3.1. Introduction, 23
3.2. Canadian Financial Intermediaries, 23
3.3. The Canadian Financial System, 24
3.4. Canadian Banking, 24
3.5. The Bank of Canada, 25
3.6. Canadian Legal Reporting and Compliance Requirements, 27
3.7. Trust Companies, Insurance Firms, and Pension Funds, 28
3.7.1. Trust Companies, 28
3.7.2. Insurance Firms, 28
3.7.3. Pension Funds, 29
3.8. Summary, 30
Key Terms, 30
Discussion Questions, 30
4. Financial Markets and Financial Instruments, 31
Chapter Objectives, 31
4.1. Introduction, 31
4.2. Why People Invest, 31
4.2.1. Description of Stock, 32
4.2.2. Description of Bonds, 33
4.3. Capital Markets, 34
4.3.1. Toronto Stock Exchange, 34
4.3.2. Other Canadian Stock Exchanges, 35
4.3.3. New York Stock Exchange, 35
4.3.4. NASDAQ, 35
4.3.5. Other Stock Exchanges, 36
4.3.6. Bond Market, 36
4.3.7. Mortgage Market, 37
4.4. Money Market, 38
4.5. Raising Financial Capital and Security Trading, 39
4.6. Financial Markets and Hedging Risk, 40
4.6.1. Forward and Futures Contracts, 40
4.6.2. Foreign Exchange Markets, 41
4.6.3. The Great Canadian Dollar, 42
4.6.4. Hedging, 44
4.6.5. Commodity Markets, 44
4.7. Key Financial Intermediaries: Lenders to the Hospitality Industry, 45
4.7.1. Commercial Banks, 45
4.7.2. Real Estate Investment Trusts (REITs), 46
4.8. Stock Market Performance, 46
4.8.1. Dow Jones Industrial Average, 46
4.8.2. Standard & Poor’s 500, 46
4.8.3. Market Performance in Terms of Return, 48
4.8.4. S&P/TSX Composite Index, 49
4.9. Summary, 50
Key Terms, 50
Discussion Questions, 50
Problems, 51
5. Review of Financial Statements and Selected Ratios, 53
Chapter Objectives, 53
5.1. Introduction, 53
5.2. Review of the Income Statement, 53
5.2.1. Uniform System of Accounts for Hotels, 54
5.2.2. Hotel Income Statement, 54
5.2.3. Restaurant Income Statement, 56
5.3. Review of the Balance Sheet, 58
5.4. Relationship between the Income Statement and the Balance Sheet, 61
5.5. Statement of Retained Earnings, 62
5.6. Statement of Cash Flows, 63
5.7. Validity of Financial Statements, 65
5.8. Ratio Analysis, 66
5.8.1. Classes of Ratios, 66
5.9. Perspectives on and Limitations of Ratio Analysis, 78
5.10. Summary, 81
Key Terms, 81
Discussion Questions, 81
Problems, 82
6. The Relationship between Risk and Return, 85
Chapter Objectives, 85
6.1. Introduction, 85
6.2. How Typical Investors Feel about Risk, 85
6.3. Returns and Distributions, 87
6.3.1. Expected Return, 87
6.3.2. The Normal Distribution, 88
6.3.3. Variance and Standard Deviation, 89
6.3.4. Standard Deviation and Risk Aversion, 90
6.4. Diversification, 92
6.4.1. Benefits of a Portfolio, 92
6.4.2. Correlation Coefficient, 92
6.5. The Market Portfolio, 95
6.5.1. What Makes the Market Portfolio Unique?, 97
6.5.2. The Market Portfolio and Risk Composition, 97
6.6. The Market Portfolio and Beta, 99
6.7. Beta, Expected Return, and the Security Market Line, 100
6.7.1. The Limitations of the CAPM, 102
6.7.2. Betas for Hospitality Assets, 102
6.8. Summary, 103
Key Terms, 104
Discussion Questions, 104
Problems, 104
7. Time Value of Money, 107
Chapter Objectives, 107
7.1. Introduction, 107
7.2. Future Value—Compounding, 108
7.3. Present Value—Discounting, 112
7.4. Future Value of an Annuity, 115
7.5. Present Value of an Annuity, 122
7.6. Perpetuity—An Infinite Annuity, 128
7.7. Present Value of a Deferred Annuity, 129
7.8. Present Value of a Series of Non-constant Cash Flows, 132
7.9. Compounding Periods Other Than Annual, 133
7.10. Effective Annual Rates, 135
7.11. Amortized Loans, 135
7.12. Summary, 138
Key Terms, 138
Discussion Questions, 138
Problems, 139
8. Fixed-Income Securities: Bonds and Preferred Stock, 143
Chapter Objectives, 143
8.1. Introduction, 143
8.2. Bond Terminology, 144
8.3. Bond Features, 145
8.4. Bond Ratings, 146
8.5. Valuing Corporate Bonds, 150
8.6. Computing Yield to Maturity on Corporate Bonds, 152
8.7. Bonds with Semiannual Coupon Payments, 153
8.8. Preferred Stock Terminology, 155
8.9. Preferred Stock Features, 156
8.10. Valuing Preferred Stock, 156
8.11. Summary, 158
Key Terms, 158
Discussion Questions, 158
Problems, 158
9. Common Stock, 161
Chapter Objectives, 161
9.1. Introduction, 161
9.2. Common Stock Features, 162
9.3. Valuing Common Stock, 163
9.3.1. General Dividend Valuation Model, 165
9.3.2. Zero-Growth Dividend Valuation Model, 166
9.3.3. Constant-Growth Dividend Valuation Model, 168
9.3.4. Valuing Common Stock with Multiple Growth Rates, 169
9.4. Common Stock Value, Investor’s Rate of Return, and Growth, 173
9.5. Summary, 175
Key Terms, 175
Discussion Questions, 175
Problems, 175
10. Cost of Capital, 179
Chapter Objectives, 179
10.1. Introduction, 179
10.2. The Weighted Average Cost of Capital, 180
10.3. Estimating the Cost of Capital Components, 181
10.4. The Cost of Debt, 182
10.5. The Cost of Preferred Stock, 185
10.6. Internal Common Equity—New Retained Earnings, 186
10.6.1. Dividend Valuation Model Method, 187
10.6.2. Capital Asset Pricing Model Method, 188
10.6.3. Bond Yield Plus Risk Premium Method, 190
10.7. External Common Equity—New Issues of Common Stock, 190
10.8. Computation of the Weighted Average Cost of Capital, 192
10.9. Using the Weighted Average Cost of Capital, 196
10.10. Summary, 197
Key Terms, 197
Discussion Questions, 198
Problems, 198
11. Introduction to Capital Budgeting and Cash Flow Estimation, 201
Chapter Objectives, 201
11.1. Introduction, 201
11.2. Classifying Capital Budgeting Projects, 203
11.3. The Capital Budgeting Decision and Cash Flow Estimation, 204
11.3.1. Net Investment Estimation, 205
11.3.2. Net Cash Flow Estimation, 207
11.3.3. Estimation of After-Tax Salvage Values, 212
11.3.4. Depreciation, 215
11.4. Summary, 217
Key Terms, 217
Discussion Questions, 217
Problems, 218
12. Capital Budgeting Decision Methods, 221
Chapter Objectives, 221
12.1. Introduction, 221
12.2. Capital Budgeting Decision Methods, 222
12.2.1. Payback Period, 223
12.2.2. Discounted Payback Period, 224
12.2.3. Net Present Value, 227
12.2.4. Profitability Index, 228
12.2.5. Internal Rate of Return, 229
12.2.6. Modified Internal Rate of Return, 231
12.3. Capital Budgeting Decision Methods and Independent Projects, 234
12.4. Capital Budgeting Decision Methods and Mutually Exclusive Projects, 234
12.4.1. Scale Differences, 235
12.4.2. Cash Flow Timing Differences, 236
12.5. Not-Normal Cash Flows, 238
12.6. The Use of Capital Budgeting Decision Methods, 240
12.7. Summary, 242
Key Terms, 242
Discussion Questions, 242
Problems, 243
13. An Introduction to Hotel Valuation, 247
Chapter Objectives, 247
13.1. Introduction, 247
13.2. Reasons for a Hotel Appraisal, 247
13.2.1. Parties Involved in the Process, 248
13.3. The Hotel Appraisal Process, 249
13.3.1. Purpose of the Appraisal, 250
13.3.2. Data Collection, 250
13.3.3. Highest and Best Use Analysis, 257
13.4. Approaches to Value, 258
13.4.1. The Cost Approach to Value, 258
13.4.2. The Sales Comparison Approach, 259
13.4.3. The Income Capitalization Approach, 260
13.4.4. Direct Capitalization, 269
13.4.5. Yield Capitalization, 270
13.5. A Rule of Thumb Approach and Revenue Multipliers, 272
13.6. Final Reconciliation of Value, 272
13.7. Summary, 273
Key Terms, 273
Discussion Questions, 273
Problems, 273
14. Capital Structure, 277
Chapter Objectives, 277
14.1. Introduction, 277
14.2. Financial Risk, 278
14.3. Business Risk, 280
14.4. Capital Structure Theory, 281
14.4.1. The Cost of Debt versus the Cost of Equity, 282
14.4.2. The Cost of Financial Distress, 282
14.4.3. The Agency Cost of Debt Financing, 283
14.4.4. Financial Leverage and the Cost of Debt, 283
14.4.5. Financial Leverage and the Cost of Equity, 285
14.4.6. The Weighted Average Cost of Capital and Optimal Capital Structure, 285
14.5. Other Significant Factors in the Determination of a Firm’s Capital Structure, 286
14.5.1. Industry Standards, 286
14.5.2. Creditor and Rating Agency Requirements, 287
14.5.3. The Need for Excess Borrowing Capacity, 287
14.5.4. Profitability and the Need for Funds, 288
14.5.5. Managerial Risk Aversion, 288
14.5.6. Corporate Control, 288
14.6. Summary, 289
Key Terms, 289
Discussion Questions, 289
Problems, 290
15. Mergers and Acquisitions, 293
Chapter Objectives, 293
15.1. Introduction, 293
15.2. Motives for M&A Activity, 295
15.2.1. Horizontal M&A, 295
15.2.2. Vertical M&A, 296
15.2.3. Conglomerate M&A, 296
15.2.4. Intellectual Capital, 296
15.3. Synergy, 297
15.4. Summary, 297
Key Terms, 298
Discussion Questions, 298
Appendix 1. Using a Business Calculator Programmed for Financial Mathematics, 299
Appendix 2. Using a Financial Calculator to Compute Effective Annual Rates, 303
Appendix 3. Using a Business Calculator to Solve the Value of a Corporate Bond, 305
Appendix 4. Using a Business Calculator to Compute a Bond’s Yield to Maturity, 307
Appendix 5. Using a Financial Calculator to Compute NPV and IRR, 309
Appendix 6. Hospitality Capital Budgeting Example, 313
Appendix 7. The Financial Storm of 2008, 319
Glossary, 321
Index, 325

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