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PROFESSOR: I see with at point where, everybody feels good
about Chapter One, and you feel good about
Chapter Two thus far.
We're going to go ahead and go over those 10 discussion
questions one more time as we did in Chapter One.
And as you've noticed online lectures and review of
homework are much shorter in duration than they are in the
classroom, so that's one of the benefits of online
teaching and learning.
The disadvantages, of course, the reason why they're quicker
is because there's no questions asked by you and no
answers explained by me.
So that being said, you need to go ahead and ask questions
via email or the telephone.
And I don't expect you all to comment every time you have a
question on homework, but if I've gone over the solutions,
and you still don't understand the concept, then it's time
for us to talk.
OK, so how are the investment decision and the financing
decision different?
The investment decision deals with purchasing assets, and
the financing decision consists of raising funds for
their purchase.
So we need to determine what type of equipment we have,
what type of building's best for our operation.
That's the investment decision.
And then we need to figure out how to pay for it, and that's
the financing decision.
What two claimants have priority over the owner's
claim to cash flows?
What I want you to do on this is I want you to go ahead and
think about the income statement, and first thing we
have is revenue, then we have expenses.
So after we make money, the first thing that happens is
those creditors get paid in expenses.
And then if there's anything left over, we have income for
income taxes, and we've got to pay the
government income taxes.
And then finally, if there's anything left, it's net
income, so creditors and government both have a higher
claim to our cash flows that we do as owners.
What two options does a firm have in disposing of its
earnings after tax?
So going back to that previous example,
we do have net income.
Now, we have to decide what to do with it.
We have two options.
We can either give it to our shareholders in the form of
dividends, or we can reinvest in back of the company and put
them in retained earnings.
And if you remember right, the way that we choose-- well,
actually, I think that's the next question, so let's go to
the next question.
What broad principle governs whether the firm should
distribute or reinvest, and it's whatever's in the best
interest of the owners.
So if we have that power company that's not going to
expand, and there's really nothing for the company to do
with those retained earnings as far as improving through
their systems or expanding their market, then they're
going to go ahead and give it back to the shareholders and
let the shareholders invest it somewhere else.
If it's a company like a high tech company or a
pharmaceutical company, where they have a large R&D budget,
and their goal is just to find the next new drug, the next
doing antibiotic, a cure for cancer, or something like
that, or possibly the new iPad, then they're going to go
ahead and take those retained earnings and invest themselves
in the hope that their share price will increase and maybe
even possibly increase future dividends.
So the premise is what's best for the owners, and then the
type of company has a lot to do with how much dividends
they pay and how much we retained earnings they
reinvest or they use.
What role do entry barriers play in the creation of value
by hospitality firms, and what are some examples of these?
And of course, entry barriers allow companies to increase
revenue and/or decrease expenses.
And if you remember right-- and I'm not going to go over
all of these.
We did all that lecture.
We've got copyrights, trademarks, and patents.
We've got unique operating locations, a decrease in
capital intensity, and reducing the variability of
cash flows.
So big question, long answer.
Each of those areas in the example answer are test
questions in among themselves, so there's a lot of
information on this one question.
What is relationship between the amount of financial
leverage used and the return on equity?
I believe I gave you an example of where we can go
ahead and open up a small business with $10,000, but if
we went ahead and used that money as financial leverage to
borrow $100,000, we now have a lot more money to go ahead and
open up a restaurant.
And because our restaurant is larger, it's going to have
larger sales, it's going to have larger income, and
hopefully, it's going to have a larger return on equity.
How might managers create value for hospitality owners
using the firm's asset structure?
Now again, this is the answer of copyrights,
trademarks, and patents.
I'm not going to read all of those.
Those are all ways to increase value using the asset
structure, and there's always competitive advantages on the
asset side.
Fast food restaurants, like I said,
started serving breakfast.
They're starting to serve late night menus.
You've got Sonic, who's got a Happy Hour in the middle.
McDonald's just put out a message saying that they're
starting to use a condensed dinner slash breakfast menu of
their most popular items from 12 midnight until 4:00 in the
morning, so they're actually having a new menu between
dinner and breakfast that's a combination of the two.
So companies are always finding ways to offer new
products without buy new equipment and increasing
business during slow times.
How might managers create value for hospitality owners
by using the capital structure?
Well, everything's pretty much been done here.
This is what we talked about, and the example the text uses
is offering a zero coupon bond.
But my question to you is if Company A offered a zero
coupon bond that was such great deal, how hard would it
be for Company B to offer a zero coupon bond?
So the capital structure's easily duplicated, and that's
why we always look for ways to create value
on the asset side.
And number nine, is it easier for hospitality managers to
create value using the asset structure
or the capital structure?
And I've already answered that.
Of course, we want to look for the asset structure to
increase value, and we don't want to focus as much on the
capital structure.
What is the rate of return trap?
And if you were to look at Exhibit 2-4, you see the
graph, and there's an optimum area on that graph.
That's where we actually borrow enough money to
maximize our net income.
If we borrow more, it starts eating into our net income,
and if we borrow less, we're underutilizing our potential.
So we do want to borrow, but we have to remember that
interest and principal payments, I should say
principal, overtake net income at some point.
So that's how people actually get into debt problems, is
they take one loan, and they're having no
problems paying it.
And then they take another loan, and they have no
problems paying it.
And then all of a sudden, they take a third loan out, and
they realize that they're having problems paying it.
And they've got to go ahead and borrow money to pay for
money, and their income starts going down.
And they go into the spiral effect where they have to
declare bankruptcy to restructure their debt.
Debt is good in business, but as it with anything, too much
of a good thing and we start getting in trouble.
So we want to watch out for the rate of return trap.
Good luck on Chapter Three.