The M Enterprise consists of four (4) hotels . The corporation’s required annual return for each hotel is 12% of each hotel’s average total assets. The net income and average total assets for each hotel are as follows:
Each hotel has the opportunity to expand. The cost per expansion per hotel is as follows:
Brock Hotel – $6MM
Smith Hotel- $5MM
Carey Hotel- $4MM
The minimum expected after tax profit per hotel is :
Gibson Hotel – $650K
Brock Hotel – $800K
Smith Hotel- $700K
Carey Hotel- $ 350K
- Determine the ROA for each hotel before the expansion consideration
- If the expansion is based on maintaining or improving a hotel’s ROA , which hotels would be best suited? Why? Explain by ranking the hotels in terms of ROA
- Calculate the residual income for each hotel before and after the proposed expansion.
- Provide a critical analysis of the rationale to expand or not to expand in your answer and show evidence of some research.
Assume 1- that the total assets have not changed over the period
2-that the average capital stock outstanding for each year of the equals 1,000,000 shares
- Determine the change in the market price of the capital stock over the years
- What are the total assets at the end of each year
- Calculate the ROE. Assume that the TOE did not change during the year.
- Be detailed, and thorough, state your assumptions clearly, and be critical in your answer. Show evidence of research
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