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The ninth chapter, entitled “Hospitality Industry Applications of Time Value of Money Concepts and Skills” explains questions to consider when securing a loan, questions to consider when raising equity, sensitivity analysis to meet lenders’ and equity investors’ financial tests and standards, finance in action case studies. | Chapter 9 Hospitality Industry Applications of Time Value of Money Concepts and Skills Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Questions to consider when Securing a Loan Questions to consider when Raising Equity Sensitivity Analysis Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Loan Components Principal Amount of money being borrowed Debt Service Fixed payments to the bank Interest Rate Percentage of loan balance Amortization Rate Number of years debt service payment is based on Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Principal Amount The amount of principal the bank will lend is based on: Cash flow projections Present value of the business Loan-to-value ratio (LTV) Loan-to-cost ratio (LTC) Debt service coverage ratio (DSCR) DSCR = Cash Flow / Debt Service Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved How much can be borrowed? Principal amount is based on: The amount of money dedicated to debt service Lender’s terms Amortization rate Interest rate LTV Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Principal Amount Calculation PMT Amount the borrower is comfortable committing to debt service N Lender’s amortization rate I/Y Lender’s interest rate CPT PV Compute for the loan amount Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved What is the maximum interest rate? Interest rate calculation: PV Amount of the loan determined by the borrower’s needs PMT Annual debt service payments borrower is comfortable paying N Lender’s amortization rate CPT I/Y Interest rate borrower needs to negotiate with the lender Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved What is the maximum amortization rate? Amortization rate calculation: PV Amount of the loan determined by the borrower’s needs PMT Annual debt service payments borrower is comfortable paying I/Y Interest rate offered by the lender CPT N Solve for the amortization rate the . | Chapter 9 Hospitality Industry Applications of Time Value of Money Concepts and Skills Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Questions to consider when Securing a Loan Questions to consider when Raising Equity Sensitivity Analysis Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Loan Components Principal Amount of money being borrowed Debt Service Fixed payments to the bank Interest Rate Percentage of loan balance Amortization Rate Number of years debt service payment is based on Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Principal Amount The amount of principal the bank will lend is based on: Cash flow projections Present value of the business Loan-to-value ratio (LTV) Loan-to-cost ratio (LTC) Debt service coverage ratio (DSCR) DSCR = Cash Flow / Debt Service Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved How much can be borrowed? Principal amount is based on: The amount of money dedicated
