Description
Please read the attached Case on different financing options available to Restaurant owner. Write a memo that is no longer than 2 pages (single spaced) which outlines your advice to the owner. The memo should include decision on which of the potential investors the owner should enter into business with. The investors are mutually exclusive – you cannot mix the investors therefore you must choose only one of the potential investors. He would like you to help him to structure the business (i.e. what business entity should he use).
In advising the owner, you need to figure out what you perceive are the real interests that each investor (or group of investors) has in getting involved with the business. You also must provide the owner with the rationale for structuring the business in the manner you have chosen and how the structure will address the investor’s interests and his interests. You also need to address how you will ensure that Owners’s interests are going to be protected in the business.
Attach any documents that you feel are relevant for Cliff to understand your recommendations
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Explanation & Answer
Attached.
Running head: Business Memo
1
Business memo
Student’s name
University Affiliation
1. Memorandum
TO:
Mr. Cliff
FROM:
(Student’s Name)
DATE:
(DD/MM/YYYY)
SUBJECT:
Business Financing and Investment
Introduction
The purpose of this memorandum is to bring to your attention the various and viable financing
available for the intended purchase of the hotel. Some financing options exist in theory that can
be applied for the acquisition of the hotel business. For over a long period, the two theories that
seek to explain which of the two best explains the financing decisions of a firm has been on two
opposing sides. Trade - off theory sets to explain that business entities have the incentive to
access debt as a major generator of their annual profits. Therefore the business entities benefit
from lesser taxation as a result of the tax shields on loans. On the other hand, the Pecking Order
theory explains that business entities may be faced with financial constraints as a result of
disproportionate communication between the owners of the company and the managers, thereby
forcing the company to come up with a selection criterion for its financing. The Pecking order
heavily postulates that following the asymmetrical information balancing between the owners of
the business and the investors, a firm is most likely inclined to utilize its retained profits first,
and then use debt that is low in risk and then lastly seeks external equity to finance its projects.
According to the financing options that are utilized by the Intercontinental group, the most likely
theory that best explains the data set available is that of the Pecking Order theory.
Considering the dimensions of financing that are most likely to explain the data as presented by
Cliff, Financial slack would mean that Cliff has access to various financing options available to
him, from cash financing, debt or bank financing, and investors input. As per the information
provided by Mr. Cliff, financial slack as a determinant of his financing is therefore not viable.
The determinant that would best describe the financing option for his hotel business should
consider his averseness to risk since the business seems to majorly rely on revenues earned from
the business and external equity from investors which are all low in risk levels, as compared to
the option of financing from the bank at 8% per annum.
Possible Business Structure for optimum returns
Analyzing the business concept that Mr. Cliff is pursuing brings out some issues that need to be
looked at from the various point of views. The analysis of the financing options and the investors
about some factors that can be considered key to the success of the business is getting some
funding without incurring the huge interest costs that would come with bank financing. The fact
that Mr. Cliff has no prior experience in the hotel industry and his desire to incorporate investors
who are willing to input their resources and interests into the business shows a lot. In line with
all the factors listed in the instructions, this report will analyze the best options for financing the
business, and that is vital to the progress and the success of the business.
a) Debt Financing from the Ban...