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Business Questions Student's First Name, Middle Initial(s), Last Name Institutional Affiliation Course Number and Name Instructor's Name and Title Due Date 1

Business Questions Question 1 i. Royalty Fee: j. The only fee that is profitable in a franchise. ii. Properties: b. The Assets and Opportunities in a Real Estate Game. iii. Financial Leverage: i. The use of debt or preferred stock financing. iv. Return on Equity: d. Cash Flow from Operations divided by Purchase Price. v. Capital Markets: c. Source of raising capital in the Primary Market. vi. Advertising Fee: e. Fee which represents a reimbursement of expenses incurred. vii. Initial Public Offering: g. The Liabilities and Equity in a Real Estate Game. viii. Bid: a. The price you will pay to own a share. ix. Ask: f. The price you will receive to sell your share. x. Return on Assets: h. Cash Flow after Financing divided by Cash invested or Cash on cash Question 2 i. Most of data collection in hotel valuations is primary data – True. Explanation: Data collection in hotel valuations is primarily done through direct observation and interaction with hotel owners, managers, and staff, known as primary data. ii. Preferred Stock earns a fixed rate of return – True. Explanation: Preferred Stock is a type of equity security that pays a fixed dividend and has priority over common stock in terms of receiving dividends and assets in case of liquidation. 2

iii. Financial Risk is all about variability of earnings – False. Explanation: Financial risk refers to the potential variability of earnings and cash flows due to changes in interest rates, exchange rates, and commodity prices, as well as credit and market risks. iv. Firm with high business risk is using fixed cost sources of financing – True. Explanation: A firm with high business risk relies heavily on fixed cost sources of financing, such as debt, which increases financial Leverage and amplifies the impact of changes in operating earnings on the firm's financial results. v. As interest rates rise, bond prices fall – True. Explanation: When interest rates rise, the present value of future cash flows from a bond decreases, which leads to a decline in bond prices. vi. Neighborhood analysis includes the question whether there is development activity around the subject hotel – True. Explanation: Neighborhood analysis is an essential aspect of hotel valuation that includes a review of the surrounding area, such as development activity, zoning, and land use, to determine the potential demand for hotel rooms. vii. The ownership interest in real estate with the most rights is a fee simple interest – True. Explanation: Fee simple interest is the highest form of ownership interest in real estate, which includes the right to use, possess, and dispose of the property, subject to any legal restrictions. viii. You purchase common Stock only for its capital appreciation – False. Explanation: Common Stock can provide capital appreciation and dividend income, depending on the company's financial performance and dividend policy. 3

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ix. Real Estate only represents land but not anything permanently attached to it – False. Explanation: Real estate includes land, as well as any buildings, structures, and improvements permanently attached to it, such as homes, commercial buildings, and infrastructure. x. Different demand segments pay same rates and stay at different times of the week and year – False. Explanation: Different demand segments typically pay different rates and stay at other times of the week and year, depending on their preferences and budget constraints. Hotel operators use revenue management techniques to optimize pricing and maximize revenue from each demand segment. Question 3 One real-life example of a hotel appraisal is CBRE Hotels Valuation & Advisory Services, the iconic Fontainebleau Miami Beach hotel in Florida. The main reason for the Hotel Appraisal was to provide the property owner and other stakeholders with an estimate of its current market value ( Bogunovic & Kukurin, 2022). The appraisal was also used to assist with refinancing efforts and provide insight into the property's revenue streams and investment potential. The five areas of the hotel appraisal and their contribution to the purpose and process of that valuation are as follows: 1. Property Description and Location: The hotel's physical features and position in the neighborhood are described in this section. These details assist in determining the property's appeal and allure to potential purchasers or investors. 2. Market Analysis: This section assesses the hotel's position in the neighborhood market by looking at supply, demand, and market trends. The potential for 4

revenue and the hotel's capacity for local market competition are both determined by this information. 3. Income and Expense Analysis: This part evaluates the hotel's financial performance, considering profit margins, occupancy rates, and income and cost streams. This information aids in estimating the future cash flow and returns on investment for the property. 4. Replacement Cost Analysis: In case of damage or loss, this section estimates the cost to repair or replace the hotel. The cost of repairing or replacing the property may be calculated using this information, which also aids in determining if the property is insurable. 5. Valuation Conclusion: This section summarizes the hotel's market worth based on the data acquired from the earlier parts. This information aids stakeholders in comprehending the hotel's market position and possible return on investment. Question 4 The real-life example of this question is the Subway franchise in the restaurant industry and the Hilton franchise in the hotel industry. The following are the six points of differences between these two franchises: 1. Location: Various settings could house a Subway franchise, including standalone buildings, airports, and strip malls. On the other hand, Hilton franchises are often situated in tourist hot spots or commercial zones. 2. Business Hours: Franchises can have different operating hours depending on the brand. For example, Subway typically operates during the day and evening, but Hilton franchises are open around the clock. 5

3. Staffing: A great staff is necessary to run a Hilton franchise - not quite the case for a Subway franchise. The more significant business calls for front desk agents, housekeeping staff, and maintenance workers to operate successfully. 4. Equipment: For a Hilton franchise, maintaining equipment for room service, laundry, and maintenance is essential, whereas a Subway franchise has fewer equipment requirements. 5. Menu/Services: A Hilton franchise is known for its various services. From dining and events to accommodations, customers have many options. Meanwhile, a Subway franchise has a smaller menu, focusing mainly on sandwiches, salads, and sides. 6. Guest Experience: Personalized attention, higher-end amenities, and access to room service make a Hilton franchise stand out from a Subway franchise in terms of the guest experience. This higher level of luxury makes Hilton a top choice for those who want to be pampered during their stay. From this comparison, we can infer that operating a hotel franchise is typically more complex and requires a higher staff, equipment, and amenities investment. Hotel franchises come with a higher demand for services of different kinds to live up to guest expectations. In contrast, owning a Subway franchise requires a less complex operational structure requiring minimal staffing, equipment, and amenities- a simple format compared to hotels ( Dudko & Strok, 2022). Consequently, choosing to embrace a hotel franchise model may need entrepreneurs to put in more capital, be willing to manage a more extensive team, and supervise operations on a larger scale. On the other hand, for a lesser investment and an easily manageable process, a restaurant franchise such as Subway may be more suitable for those aspiring to start small. 6

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Question 5 Subway's franchisees must pay a fee upfront to operate their restaurant. This initial fee for the subway is between $15,000 and $30,000, granting franchisees the authority to act under Subway's name (Bailey, n.d). The franchisor also requires regular royalties equivalent to 8% of gross sales. On top of this, franchisees may have to donate to a national advertising effort, usually around 4.5% of gross sales (Biz2Credit, 2021). Usually, Hilton's initial fee is to start a franchise between $75,000 and $175,000 (FranchiseHelp, n.d). This amount holds higher significance and value. Furthermore, the continuing royalties are approximately 5-6% of revenue, higher than usual (Biz2Credit, 2021). Hilton expects franchisees to spend about 4% of their gross revenue on marketing campaigns to entice more guests. A notable difference among the franchising fee arrangements of hotels and restaurants is that the former entails a more significant sum of upfront capital. This investment is reflected in the higher franchise fees payable to the franchisor. As we saw in the previous question, hotel franchises typically require more investment in equipment, staffing, and amenities. Hence, the higher fees for Hilton franchisees could be justified by the higher level of support and services the franchisor provides. Another difference is the higher ongoing royalties for hotel franchises. Hotels may have a more complex operational structure and require continuing support and training from the franchisor. Additionally, Hilton franchisees benefit from using a well-established brand name, reputation, and marketing strategies, which justify the higher royalties payable. In conclusion, hotel and restaurant franchises maintain contrasting fee structures due to the varying investment required. To justify the elevated rates requested by the franchisor for hotel franchises, they make available an increased level of support, 7

training, and services for the owner. Whereas franchises such as Subway, a restaurant chain, have a straightforward operational structure with lower fees due to needing less investment. To sum up, different investment levels for different franchise types result in different fee structures. Question6 The following are details provided for a real estate transaction: Square Feet of Office Space 100,000 Purchase Price: $2,000,000 Rent per Square Foot $2.00 Assume Zero % Vacancy Allowance Mortgage Payment (interest and principal) (Assume 80% of Purchase Price as Borrowing) $115,000 Calculate the following showing workings: Cash Flow from Operations = Rental Income - Operating Expenses Cash Flow After Financing = Cash Flow from Operations - Mortgage Payment Return on Assets = Net Operating Income / Total Assets Financing Cost = Mortgage Payment / Total Assets Return on Equity = Net Operating Income / 8

Total Equity where, Rental Income = Rent per Square Foot x Square Feet of Office Space Operating Expenses = 0% of Rental Income Total Assets = Purchase Price Total Equity = Purchase Price - Mortgage Cash Flow from Operations Annual rental income = Rent per square foot x Square feet of office space = $2.00 x 100,000 = $200,000 Operating expenses = $0 (based on the assumption that there are no expenses) Cash Flow from Operations = Annual rental income - Operating expenses = $200,000 - $0 = $200,000 Cash Flow after Financing Cash Flow After Financing = Cash Flow from Operations - Mortgage Payment $200,000 - $115,000 = $85,000 Return on Assets Return on Assets = Net Operating Income / 9

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Total Assets = $200,000 / $2,000,000 = 0.1 or 10% Financing Cost Financing Cost = Mortgage Payment / Total Assets = $115,000 / $2,000,000 = 0.0575 or 5.75% Return on Equity Return on Equity = Net Operating Income / Equity Equity = Total Assets - Mortgage Amount = $2,000,000 - ($2,000,000 x 80%) = $400,000 Return on Equity = $200,000 / $400,000 = 0.5 or 50% Question 7 A real-life example of a hotel chain that uses different approaches to market segmentation is Marriott International. Leading hotel operator Marriott International has used several market segmentation tactics to target clients effectively. Demographic segmentation is one strategy of market segmentation used by Marriott International. This entails segmenting the market into several groups according to age, gender, income, and education level. The Marriott Bonvoy program, geared toward travelers between the ages of 25 and 35, is one of several loyalty programs and benefits Marriott International offers. 10

Additionally, it caters to business travelers with amenities like Wi-Fi and conference rooms, while families may take advantage of apartments with several bedrooms. Another market segmentation strategy that Marriott International uses is psychographic segmentation. Marriott International has devised an approach of segmenting the market where customers are divided based on their valued lifestyles, attitudes, and beliefs. The company caters to a diverse clientele with individualized experiences, like fitness fanatics who enjoy access to fully-equipped gyms and wellness programs. Meanwhile, luxury enthusiasts can indulge in exclusive services such as high- end spa treatments and excellent dining options. Finally, Marriott International uses geographic segmentation, which divides the market based on location. Around the world, Marriott International operates different locations while providing customized offerings to meet the needs of its customers. Inferences can be drawn from these market segmentation strategies regarding the strategy's success. Marriott International has become one of the world's largest hotel chains, targeting customers based on demographics, psychographics, and physical locations. This personalized approach has helped the company attract and retain diverse customers, increasing market share and revenue. Marriott's triumph with market segmentation proves that catering to varied customer needs leads to greater contentment, loyalty, and business expansion. Question 8 One example of a real-time hotel franchise is Marriott International, which offers franchisees its brand name and operating systems in exchange for a fee. An example of a real-time hotel management contract is the Hilton Management Services, which provides management services to hotel owners in exchange for a fee. 11

Here are five points of differences between a hotel franchise and a hotel management contract: 1. Ownership: In management contracts with hotels, owners maintain ownership of the hotel, whereas, in a franchise model, the franchisee assumes ownership. 2. Branding: A hotel management agreement gives the hotel owner management services and may utilize the hotel owner's brand or a third-party brand, whereas a hotel franchise provides the franchisee with access to the franchisor's brand name, logo, and operational systems. 3. Fees: Under a hotel franchise, the franchisee pays an initial franchise fee, recurring royalties, and other expenses, including marketing fees, to the franchisor, but under a hotel management contract, the hotel owner pays a management fee to the management firm. 4. Control: The hotel's daily operations are more accessible under the franchise model, whereas the overseeing company dictates most procedures under the management contract model. 5. Support: Under a hotel franchise, the franchisor offers continuous assistance and training to the franchisee; under a hotel management agreement, the management firm assists the hotel owner with management and operational matters. This comparison shows that a hotel franchise approach is better suited for hotel owners who wish to access a well-known brand and operational systems while maintaining ownership and management of their facility. On the other hand, a hotel management contract strategy is better suited for hotel owners who wish to retain ownership while outsourcing their business operations to a reputable management firm. 12

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The decision between a hotel franchise and a hotel management agreement ultimately depends on the particular requirements and preferences of the hotel owner. Question 9 An example of a real-life Mortgage Agreement for a hotel company is the Mortgage Agreement between Marriott Hotels and JPMorgan Chase Bank (Karantzavelou, 2017). Here are five critical clauses in the agreement that Marriott should consider from the point of view of risk, default, breach, and company control: 1. Interest Rates: Marriott's mortgage clause outlines the interest rate payment requirement, which heavily affects the loan's lifetime monetary value. The inability to generate sufficient revenue would amplify the burden caused by a high-interest rate. 2. Default: Marriott must take the mortgage payment clause seriously to avoid legal consequences. If Marriott fails to pay the outstanding balance, bankruptcy proceedings or alternative legal action may be taken. A thorough review of this clause is imperative for Marriott to ensure timely payment obligations are met. 3. Collateral: Marriott might stand to lose their hotel property if it can't keep up with mortgage payments, as collateral is sometimes required in the agreement. The bank needs this for protection in case Marriott defaults. 4. Prepayment Penalty: Marriott risks incurring a substantial expense if they wish to refinance or sell the property due to penalties outlined in the agreement concerned with paying off the mortgage prematurely. Such penalties could be a considerable percentage of the existing balance. 5. Covenants: Marriott pledges various commitments regarding financial performance and operations to the bank, such as upholding a particular debt-to- 13

equity ratio or achieving specific revenue objectives. Bankruptcy of these commitments would be viewed as a violation of the mortgage agreement. Therefore, legal action may be taken by the bank. Marriott's financing plan for its hotel operations seems to rely heavily on debt, as indicated by the clauses in their agreement. By doing so, they may be taking on considerable financial risk. Their deal includes the interest rate and prepayment penalty clauses, which, in turn, suggest that they may have to pay a premium to access the capital they need (Karantzavelou, 2017). Therefore, this may hamper their financial flexibility and make it more challenging to repay the loan. It's important to note that the collateral and default clauses in the contract reveal significant economic consequences for the company if they fail to pay back the mortgage. To avoid endangering its financial stability, Marriott may want to take a closer look at the details of their mortgage plan and devise a solid strategy to manage the risks involved with financing in this manner. Question 10 Capital markets facilitate buying and selling securities such as stocks, bonds, and other financial instruments. These markets are essential for businesses to raise capital to finance their operations and growth ( Slobodianyk & Mohylevska, 2022). Below are the different types of capital markets that a hospitality business can consider for financing: 1. Equity market: In this market, businesses can offer investors ownership in stocks or shares. Those who invest in stocks do so to become shareholders, which entitles them to vote on corporate decisions ( Patel, 2021). Investors do not have a factual claim on the company's assets or revenue, which is how the stock market differs from the debt market. Equity financing does not compel the company to 14

return its raised money, but debt financing does. This is the primary distinction between the two types of financing. 2. Debt market: This market involves issuing debt securities, such as bonds, notes, and bills. The debt market enables firms to generate capital by borrowing funds from investors and paying them back with interest over a predetermined period ( Madeira, 2023). Debt securities reflect a fixed claim on the company's assets and revenue. Investors are eligible to collect interest payments and the principal amount at maturity, distinguishing the debt market from the equity market. 3. Derivatives market: In this market, financial instruments that receive their value from underlying assets like stocks, bonds, currencies, and commodities are traded. By protecting themselves from unfavorable changes in the price of the underlying assets, firms may manage risk via the derivatives market ( Vo et al., 2019). For instance, a hospitality company that purchases raw materials from a foreign nation might protect itself against currency risk by buying derivatives such as futures or options. 4. Commodities market: Physical items, including metals, energy, and agricultural products, are traded ( Rehman et al., 2019). A hospitality company can utilize the commodities market as a hedge against price changes if it employs these commodities in its operations. Two critical areas of difference between the different types of capital markets available for a hospitality business for financing are the risk and return profiles and the regulatory environment. Equity financing, for example, has higher risk and potentially higher returns as investors share in the company's profits and losses. In contrast, debt financing has lower risk and returns, as investors are paid back a fixed interest rate and 15

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principal amount ( Alim & Ali, 2021). Derivatives and commodities markets can be riskier, as they are subject to price volatility and require practical management expertise. Regulations and compliance prerequisites differ depending on the market. In the US, for instance, the Securities and Exchange Commission (SEC) oversees the equity market, while the Commodity Futures Trading Commission (CFTC) regulates the derivatives market ( Barry, 2021). A hospitality establishment must observe applicable regulations when seeking financing from these markets. 16

References Alim, W., & Ali, A. (2021). The Impact of Islamic Portfolio on Risk and Return. Bailey, R. (n.d.). How much does it cost to open a Subway? Franchise Direct. Retrieved from https://www.franchisedirect.com/information/howmuchdoesitcosttoopenasubway/ Barry, T. M. (2021). # NotFinancialAdvice: Empowering the Federal Trade Commission to Regulate Cryptocurrency Social Media Influencers. Ohio St. Bus. LJ , 16 , 279. Biz2Credit. (2021, May 5). How Much Does it Cost to Start a Subway Franchise? Biz2Credit. https://www.biz2credit.com/blog/how-much-cost-start-subway- franchise/#:~:text=In%20addition%20to%20the%20initial,franchisor%2C %20including%20marketing%20and%20training. Bogunovic, B., & Kukurin, Z. (2022). DETERMINING THE VALUE NON- PRIVATISED LAND–THE CASE OF CAMPS ON THE CROATIAN COAST. In Economic and Social Development (Book of Proceedings), 90th International Scientific Conference on Economic and Social Development– (Vol. 9, No. 357, p. 45). Dudko, E. N., & Strok, I. M. (2022). Management in International Business: electronic educational-methodical complex for specialty 1-25 01 03 World Economy. FranchiseHelp. (n.d.). Hilton Garden Inn Franchise Information. Retrieved May 10, 2023, from https://www.franchisehelp.com/franchises/hilton-garden-inn/ George, R. (2021). Market Segmentation, Targeting, and Positioning. In Marketing Tourism and Hospitality: Concepts and Cases (pp. 221-246). Cham: Springer International Publishing. 17

George, R. (2021). Market Segmentation, Targeting, and Positioning. In Marketing Tourism and Hospitality: Concepts and Cases (pp. 221-246). Cham: Springer International Publishing. Hilton. (2022). Franchise Disclosure Document. Retrieved from https://www.hilton.com/en/corporate/wp-content/uploads/2022/03/Franchise- Disclosure-Document-2022-US-Hilton.pdf Karantzavelou, V. (2017, July 12). Marriott International signs new co-brand credit card agreements with JPMorgan Chase and American Express. Travel Daily News. Retrieved from https://www.traveldailynews.com/hotels-lodging/marriott- international-signs-new-co-brand-credit-card-agreements-with-jpmorgan-chase- and-american-express/ Lawrence, B., Zhang, J. J., Hsu, L., & Zheng, S. (2021). Return on investments in hotel franchising: understanding moderating effects of franchisee dependence. Production and Operations Management , 30 (8), 2420-2440. Madeira, C. (2023). Adverse selection, loan access and default behavior in the Chilean consumer debt market. Financial Innovation , 9 (1), 49. Patel, R. (2021). Equity market integration and portfolio decisions: A study of NASDAQ USA and MSCI emerging markets Asia indexes. The Journal of Wealth Management , 24 (1), 11-39. Rehman, M. U., Bouri, E., Eraslan, V., & Kumar, S. (2019). Energy and non-energy commodities: An asymmetric approach towards portfolio diversification in the commodity market. Resources Policy , 63 , 101456. 18

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Slobodianyk, A., & Mohylevska, O. (2022). Peculiarities Of Speculative Operations On The Capital Market In Ukraine. International Science Journal of Management, Economics & Finance , 1 (2), 8-14. Vo, D. H., Huynh, S. V., Vo, A. T., & Ha, D. T. T. (2019). The importance of the financial derivatives markets to economic development in the world's four major economies. Journal of Risk and Financial Management , 12 (1), 35. 19

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