1 HFT 4464 Chapter 1 Introduction to Finance

1-2 Chapter 1 - Introduction The purpose of this course is to provide an introduction to financial management. The financial management function is an important part of every hospitality organization. Financial management is used to make key decisions involving expansion, renovation, choice of location, and many others.

1-3 What Is Financial Management? Financial management is used to help make three major decisions: 1. Which assets should we invest in? 2.How will we pay for these assets? 3.What should we do with the earnings generated by the assets? These are called the investment, financing, and dividend decisions.

1-4 Differences Between Accounting and Finance Financial accounting involves recording and classifying financial information.  Completion of accounting cycle  Compilation of financial statements Managerial accounting applies tools to financial information to generate new information.  Ratio analysis  Breakeven analysis

1-5 Differences Between Accounting and Finance Financial management involves a number of different areas such as:  Stock valuation  Bond valuation  Asset diversification  Property appraisal and valuation  Working capital management

1-6 Types of Business Organizations Sole proprietorship Partnership Limited liability partnership Corporation Limited liability company (LLC) Subchapter S corporation See bottom of page 4

1-7 Comparison of Corporate Securities Common stock  Voting rights  Can receive dividends Preferred stock  Priority position for dividends  No voting rights Bonds  Paid interest before stockholders  Limited influence on corporation

1-8 Preferred Stock and Bonds Preferred stock has a fixed dividend. Preferred stock is often callable (repurchased by the company for a certain price). Bondholders receive interest payments every six months. Bondholders receive original amount the company borrowed from them when note matures (principal). See page 6

1-9 Goal for the Hospitality Financial Manager The goal is to maximize the wealth of the owners. For a corporation, this means increasing the stock price to its highest possible level. Maximizing revenues does not necessarily mean maximizing profits.

1-10 What Affects the Stock Price? The stock price is the sum of present and future dividends. Future dividends are affected by three major factors:  The amount of the dividends  When the dividends are received  The risk associated with the dividends

1-11 Agency Relationships Owners—managers Franchisee—franchisor Owners—lenders Agency relationships involve a principal (example: owner) and an agent (example: manager).

1-12 What Is an Agency Problem? Agency problems arise when an agent does not act in the best interest of the principal. Some typical agency problems:  Shirking  Consumption of perquisites Conflict between owners and lenders led to Marriott corporation split in 1992.

1-13 What Do Hospitality Managers Do to Create Value? Increase revenues  Careful management of room rates  McDonald’s breakfast market Lower expenses  Control food and beverage costs  Decrease turnover to reduce labor costs

1-14 We Can Undertake Projects That Create Value Kemmons Wilson and the creation of Holiday Inn Marriott International  Creation of guest rewards program  In-room video check-out  Marriott’s extensive consumer research regarding courtyard

1-15 How Do We Know If a Project Creates Value? Incremental benefits$5,000,000 Less: incremental costs$4,000,000 Net benefits$1,000,000 Overall, if a project’s benefits exceed its costs, value is created for the owners.

16 Homework Assignment Questions: 1,2,3,4,7,8,11