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FINC 601 Term Project Assignment - Final Report & Presentation

Question: M&A pairs to conduct a comprehensive analysis - Park Hotels & Resorts Announces $2.7 Billion Strategic Acquisition of Chesapeake Lodging Trust.

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Answer - FINAL REPORT & PRESENTATION FOR YOUR FINC 601 TERM PROJECT

Executive summary

The present report has constituted differential nature of operations that are required to be produced conducting a financial analysis of the new venture. The report will consider discussion on differential aspects that would help in coordinating the functions of mergers and acquisition functions between two eminent organizations. Financial analysis has been effectively conducted in the current report following a number of dimensions and functioning. The efforts that are required to be produced in the target market has led to the opportunities making it comparable through variety of operations such as initiatives developed by the report to conduct a comprehensive analysis of the merger and acquisition functions of two organization.

Introduction

Merger and acquisitions are liable to derive a number of aspects in the functions of the two organizations that has been aimed or planned to be merged. The debt and equity value has been covered through the accelerating performance of two organizations that has formed mergers in order to function in the target market. A number of aspects are liable to be taken into consideration in order to ensure that the opportunities are implanted through the merger and acquisition of two organizations.

Company overview

Brief introduction of the companies

The two companies that have been considered in the current report are the Park Hotels and Resorts and Chesapeake Lodging Trust. It is required to understand the functions and the opportunities that are produced by these organizations in the target industry.

The Park Hotels and Resorts is an organization that has strived to develop a preeminent lodging functions and performances in the target industry. Their major goal is to derive the right aspects of the functioning in order to develop a lodging real estate investment trust (REIT). The preferences and functions have been found to be considering a number of atrocities that looks into convergence and operations in the target market (Coxet al. 2019). The focus of the organization has been on the development of the properties of hotel that is based on Tyson's in Virginia. The hotel was built in the year of 2017. Differential functions have been produced over time in order to integrate and leverage a number of opportunities in the real estate business and functions. The Park Hotel and Resorts own a total of 52 hotels on a whole or partial basis. However, the brand under which the hotels have been licence is the Hilton Worldwide. The company functions on definitive plan arriving to differential consideration helping to derive the complementary forms of operations. However, during the development of the business of the Park Hotels and Resorts a corporate spin-off was levied on the same (Boschmaet al. 2015). This came to an end on the date of January 4 in the year of 2017. Therefore, beyond this time the organization was able to put forward the atrocities holding the position of the second largest Real Estate Investment Trust that conducts trade publicly. The organization as a whole integrates holdings of about 67 hotels in different locations.

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The other organization considered for the report is Chesapeake Lodging Trust, which belongs to the industry same as that of the park Hotels and Resorts. The organization is a real estate investment trust and is functioning effectively as a self-advised REIT. The company majorly functions and focus on the investment which is primarily done in the upper-scale hotels. The businesses are conducted in major hotels or convention markets. Certain selective basis is put into use in the convention market functions in order to conduct the selection of the service hotels in a number of unique locations in the United States. Majorly, the company that is Chesapeake Lodging Trust functions in the urban settings and hence, their properties are chosen mostly in the urban areas (Delet al. 2017). However, the company has produced a defined USP for themselves that is acquiring the hotels at the prices much below the replacement costs of the hotels. These forms of functions create the opportunities that are quite attractive to develop and acquire hotels of high quality. Therefore, through such functions, the company that is Chesapeake Lodging Trust has been able to derive attractive yields on the investment. Hence, an upside potential is liable to be produced in the market that has occurred in case of this trust. The Chesapeake Lodging Trust currently own about 20 hotels in different locations of the United States that provides facilities of 6288 rooms in total in about 8 states altogether. However, the properties of the trust are also registered in the District of Columbia. The Chesapeake Lodging Trust acknowledges the importance of the presence of the senior members of the organization that is senior executive members in the organization (Clòet al. 2017). In order to determine the functions and opportunities that have been helpful for the organization to derive and conduct the right function in the organization the trust has ensured certain stages through financing, development, acquisition and repositioning of the asset management functions of Chesapeake Lodging Trust. This has provided the trust with the opportunities to encounter a number of target market functions integrating major opportunities in the developing market of US.

Introduction to the deal terms of M&A

The M&A is the deal that is generally completed between the parties that are generally confined in binding agreement of merger and acquisition. The M&A deal are effective in order to produce certain obligations the binds both the parties who are involved in the merger and acquisition functions. Therefore, each party has to settle certain lucrative opportunities to deal with the development and consideration of the target members to derive the opportunities in the target market. The deal also derives and produces certain terms that are required to be obliged to by the parties included in the merger and acquisition (Daiet al. 2017). However, this part of the report is liable to discuss the terms that are integrated in the M&A deals.

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The deal structure plays an important role in the development of opportunities which requires the integration of the process that is followed during creation of such M&A deals. This process is known as deal structuring. The deal is framed or processed in a manner so that there is right objective addressed that is the most important part of a merger. Certain effective terms are required to be included in the M&A deal such as:

  • The stance of negotiation of each party participating in the merger

Both the parties that are participating in the M&A process of deal is liable to bring forth certain negotiation points during the formation of the M&A deal (Wang, 2018).

  • The latent risks following the merger and acquisition process that are observable well in time along with the process that can be followed in order to manage the same

While entering M&A deal both the organizations may undergo certain risks. Few would be latent while others would be visible. However, it is important for both the companies to identify the latent risks so that the merger can be claimed to be successful rather than succumbing to their risks (Abed and Abdallah, 2017).

  • The rate of tolerance of each organization participating in the merger and acquisition process towards the risk posed on both the organization

Both the companies should ensure that they put forward the extent to which they are ready to give up their positions after the merger. This would enhance the opportunities of functioning of each company within the merger (Goranovaet al. 2017).

  • Forming conditions under the virtue of which the negation may stand cancelled

The extent of tolerance should be followed by the terms that would mark the terms of agreeability to stand the negotiation cancelled.

Challenges and opportunities faced by the company in next 2 to 5 years

These can be concerned as terms for the development of the M&A deal between two organizations. Both the organizations in question should be analysed in the basis of the opportunities and challenges following the stances of M&A. However, on the other hand, the deal structure should also be convenient in order to integrate major opportunities by the organizations (Boschmaet al. 2015).

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In terms of the performance of business the Chesapeake Lodging Trust is looking forward to synergy as a result of the merger in the future years of operations. The Chesapeake Lodging Trust expects that there would be doubling of the company turnover in the following 2 years of M&A. The merger looks forward towards the implementation of the asset management initiatives (well proven with Park)that would help in the creation of incremental value of the merger (Panibratov, 2017). Through the remiximg of the demands mix of Chesapeake the merger aims to derive enhancement in the profitability in food and beverages. The merger also aims to drive ancillary income. According to the estimation of Park there is potential to have rise of 2$4million in EBITDAby 2020. Through the year 2021 this may rise to $34million. The Chesapeake has also projected an annual savings of G&A of approximately $17million. Besides, the merger also expects to receive the benefit of enhanced scale in markets such as San Francisco.

Company analysis

Conducting financial statement analysis for both companies

Park Hotels and Resorts

Income statement analysis

The organisations' ability to generate adequate profit in order to value the shareholders' interest and expectation can be determined from the analysis of financial statements. Therefore, in order to conduct the analysis the income statement of last two years has been taken into consideration. Accordingly, within the last two financial year of 2017 and 2018 it has been noted that the organisation's total revenue has increased to 121615$ with decrease in the cost of the services provided by the hotel. Here, it can be said that the organisation has enabled itself in reducing its expenses however, net income of the company reflects in deficit signifying lower performance in the process of profit accumulation.

Financial position analysis

By analysing the financial position of the Hotel, the efficiency of the organisation in the management of its assets and liabilities may be determined. Having said that it has been noted from the given statement of financial position that the cash equivalent of the organisation has decreased within the last two financial years and at the same time it has been reported from the statement of financial position that the amount of net receivables has declined in the financial year 2018, which is 19874$. In this context, it can be said that the organisation's current liquid assets has decreased in comparison to the previous financial year of 2017.

Cash Flow analysis

Cash flow analysis allows determining the efficiency of the Hotel in significant financial activities. As per the statement of cash flows for the financial year, ending 2017 and 2018 it has been noted that the organisation net profit is negative hampering its profitability. On the other hand it has also been noted that the cash flow from the overall operating activities has declined to 4246$ in the financial year 2018 from 6032$ in the previous financial year 2018. Hence, for the given figures (refer to appendix) it can be said that the organisation current operational management is not able to generate adequate profit in order to maximise its net income after tax and interest.

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Chesapeake Lodging Trust financial statements

Income statement analysis

Similar Park Hotels and Resorts the income statement of Chesapeake Lodging Trust for the financial year 2017 and 2018 has been considered in order to estimate its financial performance by analysing its net income for the given period. The total revenue of the organisation has increased in the financial 2018, which is 41802$ however, the cost of goods sold is 12756$. On the other hand, the operating expense of the organisation has increased in the financial year 2018, which accounts to be 7902$. In this context, it needs to mentioned that the profit from operations has increased in the financial year 2018 which is 6828$ from 1588$. This implies that the organisation is able to carry out its operational activities.

Financial position analysis

The statement of financial for the financial year 2017 and 2018 of Chesapeake Lodging Trust indicates that its current assets such as cash or cash equivalent has increased in the financial year 2018, which is 9287$ from 7059 $ in the financial year 2017. Accordingly, the organization's current investing activities have comparatively within the financial year 2017 and 2018. In this regard it can be added that with the increase in investing activities the organization's profit potential is expected to increase subsequently (Kaplan and Atkinson, 2015). The Chesapeake Lodging Trust as per its statement of financial position has managed in reducing its current debt obligation as it has been noted that the accounts payable of the organisation has decreased to 5607$ in the financial 2018 from financial year 2017, which is 6584$.

Cash Flow analysis

From the given statement of cash flow (refer to appendix) it has been noted that the organisation has managed to increase its cash flow from its operational activities 6434$ in the financial year 2018. In accordance with the same it has been further noted the net income of the organisation after applicable taxes and interest has increased from the previous financial year of 2017 which is current in the financial year of 2018 is 6765$. Moreover, the organisation from its investing activities has managed to accumulate a positive cash flow in the year 2018, which accounts to be 1027$.

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Estimation of intrinsic stock value (Dividend growth model)

For the given companies Park Hotels and Resorts and Chesapeake Lodging Trust, the intrinsic value of stock is measured with 6the application Dividend Growth Model. Also known as the Gordon Growth Model, the method of dividend growth allows to estimate the value of stocks of companies under a given market condition. The further dividends of a company are estimated with the use of the said method of dividend growth. Under the method of dividend growth the value of stock are considered to grow at a constant rate which indicates the current value of the dividends of a company in its rate of growth in future periods (Brewer et al. 2015).

Calculation of Beta of Bank of Chesapeake Lodging Trust

Covariance of Stock and Index

0.0005

Variance of Market Index return

0.00137

Beta

0.36596



Cost of equity under dividend growth model

(0.82*1.04) / 174.61+0.04

4%



Current dividend= 0.82


Growth rate= 4%


Table 1: Calculation of Beta of Bank of Chesapeake Lodging Trust

In the table given table the beta for Chesapeake Lodging Trust is 0.36, which signifies low risk for the investors for investing in the given Hotel. Beta of an organisation indicates the systematic risk associated with the stock of a company. Hence, in the case of Chesapeake Lodging Trust the beta of 0.36 indicates lower systematic risk in the volatile market.

Calculation of Beta of Bank of Park Hotels and Resorts

Covariance of Stock and Index

-0.0001

Variance of Market Index return

0.00137

Beta

-0.0736



Cost of equity under dividend growth model

(0.12*1.02)/10.28+0.02

3%



Current dividend= 0.12


Growth rate= 2%


Table 2: Calculation of Beta of Bank of Park Hotels and Resorts

As per the given table the beta in case of Park Hotels and Resorts indicates negative, which signifies that the organisation's is at high risk. Therefore, considering the given beta it can be stated that the investments of Park Hotels and Resorts is declining at a significant rate. The same is due the volatile condition of the stock market and further it can lead organisations in reducing its rate of investors.

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Analysing capital structures and Weighted cost of capital

Chesapeake Lodging Trust

2017 ($m)

2018 ($m)

Weight of debt capital

3%

7%

(total debt / total capital)

1351/40534

2872/41802




Weight of equity capital

41%

43%

(total equity / total capital)

16502 / 40534

18180 / 41802




Total capital

40534

41802

Table 3: Analysing capital structures

The table above determines the weight of debt capital of Chesapeake Lodging Trust, which is 3% and 7% respectively. The weight of equity capital 41% and 43% respectively and this indicates that the cost of capital has increased in the year 2018 to 7%. Accordingly, the weight of equity capital increases to 43% in the financial year 2018. This indicates the dividend payout of the organisation is positive to the investors.

Park Hotels and Resorts

2017 ($m)

2018 ($m)

Weight of debt capital

13%

141%

(total debt / total capital)

15172 / 118243

17153 / 121615




Weight of equity capital

47%

25%

(total equity / total capital)

56024 / 118243

30975 / 121615




Total capital

118243

121615

Table 4: Analysing capital structures

The cost of capital in case of Park Hotels and Resorts has significantly increased, which is 141% for the year 2018. On the other hand the weight of equity of the organisation is 47% and 25% for the financial year 2017 and 2018 respectively.

Calculation of Weighted Average Cost of Capital Chesapeake Lodging Trust

Source of Capital

Amount ($m)

Weight

Specific Cost

Weighted Cost

Equity Capital

18180

0.650773

4%

3%

Preference Share Capital

0

0

0

0%

Debt Capital

9756

0.349227

30%

10%

Total 

27936

1

34%

13%






Weighted Average Cost of capital

13%




Table 5: Calculation of Weighted Average Cost of Capital Chesapeake Lodging Trust

The given table shows the weighted cost of capital for Chesapeake Lodging Trust, wherein, the organisations average cost of capital is 13%. The weighted average cost of capital is calculated by adding the weighted cost of equity capital, preference share capital and debt capital of the organisation.

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Calculation of Weighted Average Cost of Capital Park Hotels and Resorts

Source of Capital

Amount ($m)

Weight

Specific Cost

Weighted Cost

Equity Capital

56024

0.340367

3%

1%

Preference Share Capital

0

0

0

0%

Debt Capital

108575

0.659633

25%

16%

Total 

164599

1

28%

18%






Weighted Average Cost of capital

18%




Table 6: Calculation of Weighted Average Cost of Capital Park Hotels and Resorts

The table above indicates that the weighted average cost of capital of Park Hotels and Resorts is 18%. This further indicates that the average cost of capital of Park Hotels and Resorts is higher in comparison to Chesapeake Lodging Trust. Hence, in this context it can be said that the organisation is not able to efficiently reduce its cost of capital.

Estimating bid price for the firm applying APV model

Year

1

2

3

4

5


20000

20000

20000

20000

10000








Value of the given project

838181.8

















Debt amount

2872





Cost of debt

12%





Interest rate

7%





Tax rate

30%





PV of debt financing

2872.49











APV

NPV + PV

841054.3



Table 7: Estimating bid price for the firm applying APV model

As per the given analysis in the table above it has noted that the net present value of the organisation is 838181.8 dollars and present value of debt financing as per the calculation is 2872.49$. The Adjusted present value of the given project which is derived from adding the Net present Value and the present value of debt financing derives to be an amount of 841054.3$. Therefore, in order to estimate the bid price of the targeted company is the adjusted present value of the project can be considered which is 841054.3$.

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Methodology

In order to conduct the following project the chosen organisation that are taken into consideration are listed in the New York Stock Exchange. Here, the organisation undertakes merger and acquisition decision wherein, Park Hotels and Resorts is purchased and the organisation Chesapeake Lodging Trust is the purchased organisation. In this context, the methods incorporated in order to conduct the above stated financial analysis of both the companies the financial reports are taken into significant consideration. In doing so, the approach of managerial accounting has been incorporated wherein, the financial statements were thoroughly analysed. The financial statements that were considered here are the statement of net income or loss, statement of cash flows and the statement of financial position. The analysis of the mentioned financial reports allows estimating or gauging various financial activities and at the same time determining the efficiency of both the companies in considering the financial activities. Apart from that the model of dividend growth has been applied in case of both the companies in order to determine the rate of return nit can provide the investors (Weygandt et al. 2018). The application of dividend growth model is considered as it allows estimating the growth rate of the current dividend offered by the organisation in future period. Other than that the given project also incorporates the method of estimating cost of capital in order to determine the efficiency of the organisation in funding its capital structure. Lastly, in order to estimate the bid price of the target company, which is Chesapeake Lodging Trust with the application of adjusted present value model?

Conclusion

Two eminent organizations have been found to be considering operations that are Park Hotels and Resorts and Chesapeake Lodging Trust. A background study has been effectively conducted of these organizations in order to understand the implementation of deals and terms of the announced merger and acquisition.

The initial phase of the report has taken into consideration the derivation of the liability of the tasks that integrate major forms of studies and opportunities regarding the financial statement analysis of the companies. Other areas have also been considered to be regarded through the study includes estimation of the stock value, analysis of the capital structures, etc.

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