HFT 4464 Chapter 1 Introduction to Finance
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.
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.
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
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
Types of Business Organizations • Sole proprietorship • Partnership • Limited liability partnership • Corporation • Limited liability company (LLC) • Subchapter S corporation • See bottom of page 4
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
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
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.
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
Agency Relationships • Owners—managers • Franchisee—franchisor • Owners—lenders • Agency relationships involve a principal (example: owner) and an agent (example: manager).
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.
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
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
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.
Homework Assignment Questions: 1,2,3,4,7,8,11