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The Fillis Bistro, operated by Brownstone Restaurants, Inc., is a fine dining restaurant that caters to those with discerning taste. The executive chef was trained in France and only uses the highest-quality organic ingredients. He even grows his own herbs in a garden behind the restaurant so he can serve the freshest food possible. Restaurant sales for the Fillis Bistro have leveled off over the last couple of years, and Brownstone is trying to determine the best method for expanding the business. Management has discussed several ideas for expansion, including increasing off-premise catering sales, opening a second operation, and scrutinizing costs to cut back expense, but they cannot agree on anything. Brownstone Restaurants, Inc. owns and operates over 20 restaurants on the east coast of the United States. These restaurants include The Fillis Bistro, 6 Mexican restaurants, 5 Chinese restaurants, and 8 Greek restaurants. All of the restaurants are operating at optimal levels and reaching budgeted financial projections. 1. Utilizing the information covered in this chapter, list all growth options available to Brownstone Restaurants, Inc. 2. Analyze each expansion option and discuss the positive or negative impacts they could have on the restaurant’s operations. 3. Which expansion option would you recommend to Brownstone Restaurants, Inc. and why?

 

 
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The Williams Bennett Hotel Development Co. has identified a historic bank building that could be converted into a hotel. The location is in the heart of downtown Smithton, a densely populated metropolitan city. The structure was designed by an acclaimed architect and built in 1913. The fifteen-story building will be transformed into a chic boutique hotel with the hotel lobby, meeting rooms, cafe´, and fitness area on the first two floors. The remaining thirteen floors will contain 130 guest rooms. The entire project will cost $35,000,000. Sixty percent of the project cost ($21,000,000) will be financed through debt, and $14,000,000 is being provided by equity investors. The lender is offering a favorable 12% interest rate on the $21,000,000, and the equity investors are requiring a return of 18% on their investment. The current business tax rate is 25%. Because the structure is historic, the Williams Bennett Hotel Development Co. has been in discussions with the city government to determine if there are any public incentives for redeveloping this property. The development company knows the hotel supply in Smithton is underserved and that the city needs additional rooms to attract larger convention groups. The city would also gain from additional jobs, which would lower the unemployment rate. There are obvious benefits for both the City of Smithton and the Williams Bennett Hotel Development Co. 1. Calculate the WACC and show step-by-step calculations for the weight of debt, cost of debt, tax effect, weighted cost of debt, weight of equity, cost of equity, and weighted cost of equity. 2. Explain the tax effect and its relation to the interest portion of debt service. 3. What subsidies can the government provide to the development company? 4. In this case, the city government offered Williams Bennett a tax abatement in the amount of $1,000,000, spread evenly over the first five years of operations. Explain how the tax abatement impacts the company’s ability to pay debt service.

 

 
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Patrick Clark is a young entrepreneur who wants to open a restaurant in San Francisco, California. Because real estate prices are very high, he is not able to secure enough equity to present to lenders to convince them of the viability of his project. A friend of his, Jack Rosse, owns an auto parts store and the land where the store is located. Jack tells Patrick he will write a note for him to take to the bank that states that he is going to close his store, contribute the land to Patrick, and become a part owner of Patrick’s new restaurant. Jack, however, really has no intention of closing his store and contributing the land to Jack’s restaurant project. Can Jack still write the note for Patrick to bring to the bank? Should Patrick use this letter? What may be some of the consequences?

 

 
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Frank Douglas, a real estate developer, just finalized a major deal with Turner County to develop a major hotel/luxury condominium/golf/conference center/ residential mixed-use development on land owned by Turner County. The development is proposed to include a 150-room five-star hotel, 75 luxury 2,500 sq. ft. condominium units, an eighteen-hole championship golf course, and 360 residential golf course lots. The total development cost, exclusive of the cost of land and financing expenses, is projected to be $250,000 per room for the hotel, $200 per square foot for the luxury condominium units, $6 million for the golf course, and 10% of the current selling price of $500,000 for each residential lot. The county has agreed to contribute the land to Mr. Douglas, the developer, at no cost. The county’s justification for this contribution is the new jobs, taxes, and new visitors to the area generated by the mixed-use development. 1. Calculate the total project cost for this mixed-use development from the information provided. 2. If lenders are willing to provide 55% of the project cost in the form of debt, calculate the dollar amount of debt and equity that Frank Douglas must raise. 3. What sources of loans are available to Mr. Douglas? What sources of equity are available? Which sources of loans and equity are the best options for this development, and why?

 

 
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