Maximizing the wealth of shareholders and the Competing Theories
Introduction
The maximization of the shareholder wealth can be primarily focus on the stockholders wherein the maximization of the firm can value and covers all of the financial claims holders. This means that the firm’s financial goal is to maximize the wealth of the shareholder which can be use for decision making and to maximization of value. The central fact that can be reason out in the maximization of the shareholders wealth is the justification of the means in the much and more fundamental end. Principally, the main objective of the firm or its inclusive goals is the maximization of the shareholders wealth (Baker and Powell, 2005, p.8).
In contrast to the popular belief, majority of the company does not have the unlimited resources. In the aid of the strategic planning, the company can enable to marshall the resources to its competencies and in leveraging to the other business units and the bottom line will be the future growth and the opportunities that the company is facing. These factors can increase the value of the company where the shareholders have concerned and that is only the thing that matters. This can also be seen if the value had been translated into the grater profits which can be appreciated in the stock value and higher dividend payout (Brigham and Gapenski, 1991, p. 19).
Theoretical View of Maximizing Shareholder Wealth
The company can have its profit when the company will have the revenue which exceeds the expenses. This is the time that the company will have the option to decide what will be done on the profit which is to distribute on the profits to the shareholders or just keep them. The shareholders are considered to be the real owner of the company which can give the company cash in order to have the ability to star while having their share in turn. If the profits are kept, then they are the retained earnings which can be use in order to pay off the old debt as well as the other expenses. This simply means that the company maximizes the profit to its shareholders. In general, the more profit the company will make can also have the more chances that it can pay out the shareholders which mean that the share price is also related to the corporate profit (Ehrbar, 1998, p. 19).
The Break Even Point Analysis
Before taking into the account of break even analysis, it is only important to determine the operating leverage which is also the operating risk and refers to the operating costs that can be found in the income statement of the firm. This also implies that the higher the financial leverage will also be higher the financial risk which also the higher the cost of capital and it is rises due to the raise of the funds and risky to the business (Shim and Siegel, 1998, p. 305).
The break even analysis is then important for understanding in the nature of operating leverage. This signifies that the break even point is the level of the sales whereas there are no results and there are no profits. In determining for the break-even point, the company’s cost can be divided into variable costs which are the costs that are directly vary in proportion to the change of the volume as well as the fixed costs which are the costs which retained to be constant despite of the volume (Ibid).
The break even point for the hotel can be found easily through setting the sales or the income in the total fixed costs plus the variable costs.
This must satisfy the equation:
Total Income (sales) = Fixed Costs + Variable Costs
The fixed costs consist of the following:
Purchased costs (£ 40 m)
Cost for renovation (£ 10m)
Annual running costs which consists:
Advertising (£ 400,000)
Maintenance (£ 300,000)
Salaries and wages (£ 59,000)
Heat and Light (£ 1,500,000)
Administration 291,000
The total Fixed Costs therefore is: (£ 52, 550, 000)
The Variable Costs Consists:
Breakfast £ 2 per person every night
Evening Meal £ 6 per person per night
Cleaning and Laundry £ 7 per person every night
£ 15 per person every night (5460 every year)
The Drinks in the bar £ 10 per night and per guest (3,640 every year)
The wages on the of the three staff (£ 5.52/hour) or (144,668.16 every year)
The Total Variable Costs Therefore: (£ 153,768.16)
Income = Fixed Costs + Variable Costs
= (£ 52, 550, 000) + (£ 153,768.16)
= £ 52, 703, 768.16
To make it a break even, the hotel must have the income of £ 52, 703, 768.16.
Therefore, in getting the payment of the customers every night, the income must be divided by the 364 or the operating days of the hotel for the entire year.
The daily income of the company must be £ 144,790.5719. Since the expected average occupancy for budgeting is 70%. Then, it is important to determine to divide it by 70 people. The price that the hotel needs to charge in its customers per guest therefore is £ 2,068.436 to make it at the break even.
The ROCE – Return on Capital Employed
The ROCE can have the ability to earn the return for all of the capital which cans employs. This can be calculated on the determining the percentage of the utilized capital of the company that had been made prior the tax profits and the borrowing costs. This is also primarily use for measuring and comparing the two business performances as well as the assessment on generating the business in the returns of payment for the capital (Phillips, et. al., 2006, p. 201).
The formula for the ROCE is:
ROCE = the Pre Tax Operating Profit
Capital Employed
The Profit for the Operation = ROCE (Capital Employed)
= 0.20 (£ 2,068.436)
= £ 413. 6872 operational profit every night and every person
The hotel therefore must require its customer of £ 2,482.1232 so that the consortium will acquired the said figure.
The Net Present Value and the Internal Rate of Return for the Hotel
The net present value is the value for the future cash inflows as it is compared to the current outflow of the initial investment. This can also indicate and measures for making decision in the future of the business which implies that the positive NPV needs to support the project while negative shows risky for the firm. On the other hand, the Internal Rate of Return is the rate of interest that can make in the present vale for the projected future cash flows that are equal to the rate in making the net present value (NPV) to be equal to zero. This also implies that the projects can be considered to be effective if it is greater that the rat of return which can be earned in the alternative investment (Gorchels, 2005, P. 98).
The Net Present Value for the Investment in Hotel will be:
The Present Value (£)
T = 0 (-£ 52,703,768.16)
T = 1 (903,492.8448)/1.121
806,690.04
T = 2 (903,492.8448)/1.122
720,258.9643
T = 3 (903,492.8448)/1.123
643,088.361
T = 4 (903,492.8448)/1.124
574,186.0366
T = 5 (903,492.8448)/1.125
512,666.1041
T = 6 (903,492.8448)/1.126
457,737.5929
T = 7 (903,492.8448)/1.127
408,694.2794
T = 8 (903,492.8448)/1.128
364,905.6068
T = 9 (903,492.8448)/1.129
325,808.5773
T = 10 (903,492.8448)/1.1210
290,900.5155
NPV
-£ 48,007,526.36
The Internal Rate of Return for the Hotel is -47.88% which is risky for any business and it is not advisable to use.
The Possibility of Charging £ 80 on Weekends
Despite of the fact that the charging £ 80 during weekend is helpful to the company because it can generate much customer which cam serve almost its guests. These can also encourage the guest to avail the services of the hotel and to maximize its revenues and profits. These are also the actions that can constitute to the commodities so that the demand can be increase which can also be applicable if it appears to threatens and expire as well as saleable. On the other hand, there might be difficulty in arising for selling the services in the future due to the estimated elasticity of the demand as the remaining time prior the expiration of the service. Using this irregularly can have the consequence when customers get to use to it. Nevertheless, the expectations in the future can encourage to be judged low. Therefore, the limitations on the prices every night and every person that coming on the hotel must be properly analyze because it is the suitable selling of the services before the service had expire and because it has the negative effect on the position of the services. Although, in general, this will have be advantageous to the hotel as it can generate sales and can also avoid the precision of the segment which can be targeted in the method.
Generating Additional Revenue
In generating income for the hotel, it is not as fast as the snap of the finger. This can take time in analyzing and proper knowledge for the solution of the dilemma. Nevertheless, this can be avoided with the proper move and strategy. First and foremost, the hotel must have the adequate accounting judgement as well as the better market research. This can also be rooted in the good management taken from the head of the company and the efficient practices that can re enforce in the in the use of better services. The use of advertising, credit card processing and the marketing development can also be helpful in generating much income. The innovations for the dining rooms and to the hotel bar can also be helpful in the increase of revenues for the hotel. Most of the operators also determined that the well-conceived beverage and food outlets can also increase the demand for the meetings and guestrooms which can be attractive in the general public which are especially for the dinner and for lunch and it can also generate additional profits. These can also vary on the designs and to the programs of every outlet that must be develop to the local existing and market competition. For the operations of the hotel, there must have the direct interaction with the external and paying customers so that it can also generate profits and revenues. In following the main objective of any business a sin the hotel which is to maximize he revenue and to minimize the cost or the expenses, it is only important to determine to follow the producers and policies as well as the tools in hospitality manager for every particular department of the room. The use of Revenue per available room (RECPAR) can be use in order to maximize the total room that the hotel will have in managing the occupancy and the average rate of the maximization of the room revenues. This is applicable for eth hotel due to the fact that it includes the two financial measures and to identifies the hotel in combining the two strategies for maximization of the rooms that are being sold and the average room rate which can form a strong and useful financial measurement. The hotel room revenues can also increase its total revenues through increasing the average rate as well as willing to be run in the lower occupancy of the percentage. The analyzation for the revenue is not yet completed without analyzing the expenses which is also part of the business cycle. In this regard, the knowledge and practice on the important expenses that must be controlled and analyze are the wage cost and the food costs. These are important due to the direct effect on the benefit costs. For so many expenses of the business, these are entitled to have the attention the hotel managers for every hotel department which must be effective in controlling and managing the expense accounts if the profits of the hotel want to maximize. This signifies that whenever the manager have the effective control for her or his expenses in the department, the expenses of the hotel will be in line and can also maximized the profits (Hales, 2005, p. 155-156).
Bibliography
Gorchels, L 2005, The Product Manager’s Handbook, McGraw-Hill Professional, New York.
Phillips, P et. al., 2006, The ROI Fieldbook: Strategies for Implementing ROI in HR and Training, Butterworth – Heinemann, United Kingdom.
Shim, J and Siegel, J 1998, Schaum’s Outline of Financial Management, McGraw-Hill Professional, New York.
Ehrbar, A 1998, EVA: The Real Key to Creating Wealth, John Wiley and Sons, Economic of Value Added.
Brigham, E and Gapenski, L 1991, Financial Management: Theory and Practice, Dryden Press, United States.
Baker, K and Powell, G 2005, Understanding Financial Management, Balckwell Publishing, United Kingdom.
Hales, J 2005, Accounting and Financial Analysis in the Hospitality Industry, Butterworth-Heinemann, United Kingdom.
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