Consulting Report of Solberri Hotel

Solberri Hotel January 20 2012 This propound is in response to the request by Solberri hotel root for a criticism of its confront issues and identification of possible solutions. Consulting report ? STATE OF AFFAIRS Solberri is a group of spa hotels registered as a listed company with 12 resort hotels in Europe. completed in the 1980s, it had run successfully until 2003 and also makered losses in 2005 and 2006. To rectify the situation, Solberri implemented st accountgy changes to the hotel operating environment much(prenominal) as the pricing changes and a overhaul program.With these adjustments, situation gets better with a large forecast funds in supernumerary in this financial socio-economic class. Currently the chain of hotels is faced with critical issues revolving or so its motion including human resources that argon better explained with the help of SWOT abbreviation in Appendix 1. It is important for Solberri to make do of the management tools to understa nd the new situation and to achieve the revenue target, increased share holder appraise and better guest satisfaction. ? ISSUES IN HAND Solberri is faced with multiple issues that act as a barrier to set up their goals and target.From our review and understanding of the environment we lay forth the below issues and rank them as priority and other issues. Priority issues unworthy client experience that could be a result of safe issues such(prenominal) as o ugly treatment of General manages and senior employees. oMisdistribution of tips oInvestment in un bankable environment whole in ally genial initiatives. The potential need to borrow money to enhance spas before the 2007/08 bloom season The need to raise tenancy rates and earnings generated from extra charges to do the planned revenue for the financial course of study ending family 2008 The forgetful share outgo and vulnerability of SolberriOther issues Installation of solar panels Non-participation in the foreign star ratings system Potential problems with the bore of outsourced armed services Upgrading website to include a virtual tour of facilities . ? ISSUE analytic thinking In this section, the analysis is done for abstract priority issues. Customer service and relevant HR issues. The quality of customer service is crucial to companies survival in service indus raise. Unfortunately, the service provided by Solberri failed to meet the expected banal of its customers.The main reason for poor customer service is employees lack of skills and motivation. The majority of Solberri employees are temporary, with express k right awayledge of the hotel industry and relevant skills. Besides, all pathetic-term employees just now receive ii days introduction fostering which is apparently insufficient. The customer service lav be improved in two aspects. In the short term, Nick Silva, customer service Director, needs to review staffing direct immediately to meet the upcoming demand. Stric t selection and a special regular training program are needed to ensure the quality of its employees.In the long term, adjusting the ratio of the number of long employees to that of short-term ones is necessary. Too umteen temporary employees lead to poor customer service and low line of business of talents, resulting in General managers written reporting long hours and under high stress (to a greater extent flesh out in ethical issues). Though more long-term employees mean more monetary values, the benefits from improved customer service leave aloneing outweigh the be. Furthermore, because recognition of employees efforts can bugger off them to offer better service, some motivation measures are recommended.According to ERG theory, peck in different trains have different needs. Most temporary employees are in the existence level, they need money to maintain their existence requirements, and therefore incentives such as bonus pull up stakes be useful. tho, most long-ter m employees are in relatedness and growth level, so incentives such as vocation award or decision making involvement will be suitable. With the new recruitment, training and incentives, its estimated that an additional employee cost of 7. 5 one thousand thousand will be incurred, a 12% increase from last class. good issuesTwo ethical issues will be discussed in this report. a. Poor treatment of employees. General Managers and key senior employees are working under high stress over 16 hours every day. Solberri gets into ethical issue of overworking employees and paying no compensation. Due to a famine of senior employees, their workload is unlikely to be reduced immediately. Therefore, the hotel should compensate for their overwork. To solve this problem fundamentally Soberri should re table service sufficient elites by increasing its long-term employees. b. Misdistribution of tips.When Solberri put in all the tips and evenly distributed them to employees, an ethical issue arose for the transparency and fairness of such distribution. much(prenominal) controversial tips distribution should be changed back to the traditional wayemployees can keep the tips for themselves. For those non-facing-customer employees who dont get tips, Solberri is recommended to increase their bonus to make up the difference. Forecast change exorbitanceage coronation issue Before analyzing the quadruplet proposals, its important to know how much property is available for empowerment.Since Solberri is under bring agreements and other financing alternatives such as rights issue cant raise funds in a short time, the tho source of funds is the internal capital. Its estimated that 59 meg cash will be generated from operations in this financial year. After deducting finance cost, tax revenue, dividends and additional HR amend costs in the depression issue, theres only 30. 9 one billion jillion cash available. (Appendix 2. 1) The total amount for the four proposals is 123 million (Appendix 2. 2).Solberri has to perform a cost benefit analysis to choose the most profitable proposal as it is clear that Solberri doesnt have enough funds to implement all of them. Proposal A is to extend the number of rooms at the four postmortem hotels by adding each a nonher 200 rooms and supporting facilities. Its estimated to generate 10 million NPV for each hotel over a 5-year period establish on an 80% occupancy level. However, this whitethorn have some controvert effects since the additional rooms and facilities make the hotel more crowded and less comfortable. Therefore, the 80% occupancy level is not guaranteed.Besides, its just the first year that Solberri has had such high occupancy levels. Extending the number of rooms in such a large scale is too risky. Proposal B is to set up in refurbishment and extend spa facilities at the remaining hotels. The forecast cost is 6 million for each hotel. The high level of bookings at the 4 postmortem examination hotels during the 2008 Peak season has demonstrated the success of the refurbishment plan. So this proposal contains comparatively little risk. Furthermore, spa facilities have become a key change point in resort hotels.This new trend provides great opportunity for Solberri to nonpayment from the Red Ocean, the very competitive market of traditional resort hotels. By differentiating itself by providing exclusive spa facilities, Solberri can successfully grab the Blue-ocean market, namely the profitable and rapidly-developing market of resort hotels with exclusive spa facilities. Finally, refurbishing the hotels can improve Solberris profit margin. However, refurbishing all the remaining hotels simultaneously is beyond Solberris financial ability. Its recommended that Solberri refurbish only three hotelstwo topnotchior and one Super Plus.Refurbishing the Super Plus hotels is riskier since there is no previous experience and the refurbishment will need to close permanently 15 rooms in ea ch hotel. But if Solberri only refurbish Superior hotels, in a short time, there will be a gap in middle-priced hotels, which is unfavorable to the companys strategic development. Proposal C is to acquire an additional resort hotel be 24 million. The expected NPV is 39. 2 million (Appendix 2. 3). Besides, the breakeven occupancy level is 60% (Appendix 2. 4), which is quite easy to achieve. So Proposal C seems profitable with intelligent risk.However, the initiate cost is too large as its for only one hotel. Compared with Proposal B, its too risky for Solberri in its first year with such good performance. Proposal D is to invest in environmentally friendly initiatives including the installation of solar panels costing 6 million and other environmental initiatives costing 9 million. Though investing in these initiatives cannot generate bread for the company directly, it can help establish Solberri as a socially responsible company which will be positive to its image. But funds ar e so limited that investing in all these in unrealistic.Its recommended that Solberri invest in the solar panel project first since it can make cost savings of 0. 6 million per year and defer the others. Loan covenant prohibition The 20 million lend negotiated at the end of 2007 has loan covenants restricting the companys further loan financing within 2 years from fallember 2007, resulting in a probable capital shortage for its approaching development. Solberri can try negotiating with the bank for removal of restriction by presentation them the latest forecast figures and the high level of bookings. However, the good performance of only one year wouldnt be convincing enough to the bank.Solberri can also try refinancing by issuing additional stocks finished public crack or private agreement. However, due to the relatively high standard and costly allowance of public religious offering, private placement is preferable. With low threshold for issuing, private placement is feasible for Solberri whose business just began to pick up after slow seasons. With the good performance this year, its probable that the Solberri will attract strategic investment from institutional investors via private placements to ensure its future development. The poor share price and vulnerability of SolberriRECOMMENDATION Customer service and related HR issues. It is recommended that Solberri immediately work out a plan for recruitment and training, to ensure job fit and effectual training among all employees. Employees who cant provide the high standard of service will be refused or assigned to non-facing-customer positions. Moreover, Solberri should set up allot motivation mechanisms such as bonus and vacation rewards. It is also recommended that Solberri blow up its long-term employee proportion by training some short-term employees to be dainty long-term ones.In this way, more employees will cultivate a experience of responsibility and can handle the previous tempo rary employees work in non-peak season. Ethical issues Its recommended that Solberri compensate for employees overwork. In the long run, the company needs to puff out its senior employee reserve. Its recommended that Solberri abandon its controversial tips distribution and set up a bonus system for non-facing customer employees to make up their income difference. Forecast cash surplus investment issueIts recommended that Solberri spend its forecast cash surplus on Proposal B to refurbish and extend the spa facilities at two Superior hotels and one Super Plus hotel, which costs 18 million in total. Since its just the first year Solberri has performed so wholesome in these years, its better for it to be conservative towards investment. Its also recommended that Solberri invest in the installation of solar panels at all 12 hotels costing 6 million and postpone other environmentally friendly initiatives due to its limited funds. These two plans will result in 6. 9 million cash retaine d Appendix 2. 5), which will help improve the liquidity of Solberri. . Loan covenant restriction It is recommended that Solberri try to negotiate with the bank for removal of the restriction. If its not workable, Solberri could try seasoned equity offering to refinance either by public offering or private placement, while private placement seems to be most feasible for Solberri and thus is highly recommended. If external financing doesnt work, it is highly recommended that Solberri try all means to control its costs. The poor share price and vulnerability of Solberri ? CONCLUSIONSolberri is now at a crucial time since its the first time it has had such good performance in these years. It is now facing several important issues. The most important ones are how to solve the poor customer service problem and which investment proposal to choose for its future development to increase the occupancy level for all the hotel rooms. It is believed that the analysis and recommendations supra ca n serve as useful references for its decision-making. Solberri has to differentiate itself in the market through a shift by showcasing its spa facilities as its forefront in capturing spend makers.With a change in visa regulations in Europe Solberri may opt to pay more attention to its local clients by offering the day use of the hotels services and facilities during non-peak seasons. To position itself as a holiday resort hotel, there should be a refurbishment of Solberris hotels to Premier standards ? SWOT ANALYSIS STRENGTHS Good reputation with a long history turn up track record of range of spa facilities Successful refurbishment program Many of long-term employees have worked for Solberri for over 10 years with rich experience. shelter co-operation with several travel agents. Experienced board directors. High sense of Corporate Social Responsibility( 1 hotel won a bronze award in the parkland Tourism business awards, 2007 High level of bookings for Peak season 2008 with lar ge cash surplus forecast WEAKNESS Outdated information applied science systems. restrictive loan covenant. Difficulty in enforcing agreed quality service levels. Declining share price compared to 2002 Poor customer service with disappointing customer feedback. Low level of repeat booking. Lack of motivation of short-term employees. Poorly structured financial planning. Resignation of pay Director. OPPORTUNITIES High level of bookings and a forecast cash surplus of 59 million which can be used for further expansion, refurbishment program, paying dividends, and(or) clashing CSR by investing in environmentally friendly initiatives huge potential market for Spa service Pricing structure changes to boost occupancy levels in effect(p) use of variety of media to generate more sales THREATS immaterial completion from other hotel industries Understaffing and poor service to meet the high level booking that could involve reputation Resistance from Competitors having state of art inf ormation technology can be market eaders. Fall in spa revenues of one premier hotel due to a rival business operated by an ex-manager. Difference of purview amongst management staff may delay the strategy implementation. WORKINGS 2. 1. 1 Investible surplus 59 million is cash generated from operations before finance costs, tax and dividends, which should be deducted. Besides, the additional operation cost incurred by human resources management should also be deducted in order to get the available cash for investment. 2. 1. 2Cost of finance S. No. AmountRate of InterestDetailsDuration for CYInterest Cost a. 12 m10%Oct- Dec 073 months0. 3 m b. 6 m8%Repayable in Sep 20101 yr0. 48m c. 15 m11%June 20121 yr1. 65m d. 20 m10%Jan-2008 to Dec 149 mths1. 5m center3. 93 m Notes a. 12 million loan at 10% repayable in declination 2007 -As its repayable date is in December 2007, the interest expense incurred in this accounting period is only for three months (October 2007 to December 2007). 12 million*10%*3/12 = 0. 3 million b. 6 million loan at 8% repayable in September 2010 -6 million*8% = 0. 48 million c. 15 million loan at 11% repayable in June 2012 -15 million*11% = 1. 5 million d. 20 million loan at 10% beginning in January 2008 and repayable in December 2014 -As this loan began in January 2008, the interest expense incurred in this accounting period is only for nine months (January 2008 to September 2008). 20 million*10%*9/12 = 1. 5 million 2. 1. 3 revenue enhancement expense As stated in the case, the post-tax profit for the year ended September 2008 will be 27 million. Based on the tax rate of 32%, the taxable income = 27 million/(1-32%) = 39. 7 million . Therefore, the tax expense = 39. 7 million*32% = 12. 7 million 2. 1. 4 DividendsIn 2007, Solberri made a profit of 5 million and paid 2 million for dividends, which equals a dividend per share of 0. 083. Its recommended that Solberri double the DPS this year, making the total dividends expenditure as much as 4 million. 2. 1. 5 extra operation cost As is mentioned before, the high occupancy level this year will incur additional operational cost due to the employee recruitment, training and motivation. It estimated to be around 7. 5 million based on an estimated 12% increase compared with 2007 when the staff costs were 62 million. Cash Available for Investment( in million)Investible surplus( before deduction)= 59. 00 less(prenominal) Interest cost 3. 93 Tax expense 12. 7 Dividend expense 4. 00 Additional operation cost 7. 5 salary surplus= 30. 9 2. 2. fit cost for all four investment proposals ProposalInvestment cost per hotelNumber of hotels perfect cost A9 million436 million B6 million848 million C****24 million D15 million Total cost123 million **Total cost for Proposal C = acquiring cost + refurbishing cost + marketing cost = 5 million +16 million+3 million = 24 million Total cost for Proposal D = 15 million 2. . Expected NPV of Proposal C As is shown in the case, when occupancy l evel equals 95%, the NPV will be 100. 0 million. When its 80%, the NPV will be 35 million. When its 50%, the NPV will be 25 million. And their probabilities are 25%, 60% and 15% respectively. Therefore, the weighted average NPV = 100. 0 million*25% + 35. 0 million*60% +(-25 million)*15% = 42. 2 million However the marketing cost of 3 million is excluded in the above NPV, so the expected NPV of Proposal C = 42. 2 million 3 million = 39. 2 million 2. 4. Breakeven occupancy level of Proposal C When occupancy level equals 95%, the NPV will be 97 million.When its 50%, the NPV will be -28 million. Thus, when the occupancy level decreases by 1%, the NPV will decrease by 2. 78 million. 97 million (-28 million) / (95-50) = 2. 78 million In this way, when the occupancy level changes by about 35% (97/2. 78), the NPV will decrease to zero. Therefore, the breakeven occupancy level is around 60%. 2. 5 Estimated cash retained Estimated cash retained = cash available for investment investment co sts = 30. 9 million 24 million = 6. 9 million Comparison between Solberri and enlightenment Asia hold with the DuPont stupefy 3. 1 DuPont Model of Solberri 2007 Return on lawfulness (ROE) 0. 568 Return on Assets (ROA) 0. 3086? beauteousness Multiplier (EM) 1. 8409 Profit border 0. 0314? Total Asset derangement 0. 9815 1 /(1Debt Ratio 0. 4568) bread Income/ crystalize sales Net Sales/ honest Total Assets Total Liabilities/Total Assets 3. 2 DuPont Model of Shangri-la Asia Limited 2007 Return on Equity (ROE) 0. 1046 Return on Assets (ROA) 0. 1029? Equity Multiplier (EM) 1. 016 Profit Margin 0. 3069? Total Asset Turnover 0. 3354 1 /(1Debt Ratio 0. 0159) Net Income/Net Sales Net Sales/Average Total Assets Total Liabilities/Total Assets Comparison between Solberri and Shangri-la Asia Limited with the DuPont Model 3. DuPont Model of Solberri 2007 Return on Equity (ROE) 0. 0568 Return on Assets (ROA) 0. 3086? Equity Multiplier (EM) 1. 8409 Profit Margin 0. 0314? Total Asset Turnover 0. 9815 1 /(1Debt Ratio 0. 4568) Net Income/Net Sales Net Sales/Average Total Assets Total Liabilities/Total Assets 3. 2 DuPont Model of Shangri-la Asia Limited 2007 Return on Equity (ROE) 0. 1046 Return on Assets (ROA) 0. 1029? Equity Multiplier (EM) 1. 016 Profit Margin 0. 3069? Total Asset Turnover 0. 3354 1 /(1Debt Ratio 0. 0159) Net Income/Net Sales Net Sales/Average Total Assets T Solberri Hotel January 20 2012This report is in response to the request by Solberri hotel group for a review of its facing issues and identification of possible solutions. Consulting report ? STATE OF AFFAIRS Solberri is a group of resort hotels registered as a listed company with 12 resort hotels in Europe. Established in the 1980s, it had run successfully until 2003 and also incurred losses in 2005 and 2006. To improve the situation, Solberri implemented strategy changes to the hotel operating environment such as the pricing changes and a refurbishment program. With these adjustments, situation ge ts better with a large forecast cash surplus in this financial year.Currently the chain of hotels is faced with critical issues revolving around its operation including human resources that are better explained with the help of SWOT analysis in Appendix 1. It is important for Solberri to make use of the management tools to understand the current situation and to achieve the revenue target, increased share holder value and better customer satisfaction. ? ISSUES IN HAND Solberri is faced with multiple issues that act as a barrier to meet their goals and target. From our review and understanding of the environment we put forth the below issues and rank them as priority and other issues.Priority issues Poor customer experience that could be a result of ethical issues such as oPoor treatment of General manages and senior employees. oMisdistribution of tips oInvestment in unprofitable environmentally friendly initiatives. The potential need to borrow money to enhance spas before the 2007/ 08 Peak season The need to raise occupancy rates and earnings generated from extra charges to hit the planned revenue for the financial year ending September 2008 The poor share price and vulnerability of Solberri Other issues Installation of solar panels Non-participation in the international star ratings system Potential problems with the quality of outsourced services Upgrading website to include a virtual tour of facilities . ? ISSUE ANALYSIS In this section, the analysis is done for top priority issues. Customer service and relevant HR issues. The quality of customer service is crucial to companies survival in service industry. Unfortunately, the service provided by Solberri failed to meet the expected standard of its customers. The main reason for poor customer service is employees lack of skills and motivation.The majority of Solberri employees are temporary, with limited knowledge of the hotel industry and relevant skills. Besides, all short-term employees only receive two d ays introduction training which is apparently insufficient. The customer service can be improved in two aspects. In the short term, Nick Silva, customer service Director, needs to review staffing level immediately to meet the upcoming demand. Strict selection and a specific regular training program are needed to ensure the quality of its employees.In the long term, adjusting the ratio of the number of long-term employees to that of short-term ones is necessary. Too many temporary employees lead to poor customer service and low stock of talents, resulting in General managers working long hours and under high stress (more details in ethical issues). Though more long-term employees mean more costs, the benefits from improved customer service will outweigh the costs. Furthermore, because recognition of employees efforts can stimulate them to offer better service, some motivation measures are recommended.According to ERG theory, people in different levels have different needs. Most tempo rary employees are in the existence level, they need money to maintain their existence requirements, and therefore incentives such as bonus will be useful. However, most long-term employees are in relatedness and growth level, so incentives such as vocation award or decision making involvement will be suitable. With the new recruitment, training and incentives, its estimated that an additional employee cost of 7. 5 million will be incurred, a 12% increase from last year. Ethical issuesTwo ethical issues will be discussed in this report. a. Poor treatment of employees. General Managers and key senior employees are working under high stress over 16 hours every day. Solberri gets into ethical issue of overworking employees and paying no compensation. Due to a shortage of senior employees, their workload is unlikely to be reduced immediately. Therefore, the hotel should compensate for their overwork. To solve this problem fundamentally Soberri should reserve sufficient elites by increas ing its long-term employees. b. Misdistribution of tips.When Solberri collected all the tips and evenly distributed them to employees, an ethical issue arose for the transparency and fairness of such distribution. Such controversial tips distribution should be changed back to the traditional wayemployees can keep the tips for themselves. For those non-facing-customer employees who dont get tips, Solberri is recommended to increase their bonus to make up the difference. Forecast cash surplus investment issue Before analyzing the four proposals, its important to know how much cash is available for investment.Since Solberri is under loan covenants and other financing alternatives such as rights issue cant raise funds in a short time, the only source of funds is the internal capital. Its estimated that 59 million cash will be generated from operations in this financial year. After deducting finance costs, tax, dividends and additional HR reform costs in the first issue, theres only 30. 9 million cash available. (Appendix 2. 1) The total amount for the four proposals is 123 million (Appendix 2. 2). Solberri has to perform a cost benefit analysis to choose the most rofitable proposal as it is clear that Solberri doesnt have enough funds to implement all of them. Proposal A is to extend the number of rooms at the four Premier hotels by adding each another 200 rooms and supporting facilities. Its estimated to generate 10 million NPV for each hotel over a 5-year period based on an 80% occupancy level. However, this may have some negative effects since the additional rooms and facilities make the hotel more crowded and less comfortable. Therefore, the 80% occupancy level is not guaranteed.Besides, its just the first year that Solberri has had such high occupancy levels. Extending the number of rooms in such a large scale is too risky. Proposal B is to invest in refurbishment and extend spa facilities at the remaining hotels. The forecast cost is 6 million for each hotel . The high level of bookings at the 4 Premier hotels during the 2008 Peak season has demonstrated the success of the refurbishment plan. So this proposal contains relatively little risk. Furthermore, spa facilities have become a key selling point in resort hotels.This new trend provides great opportunity for Solberri to escape from the Red Ocean, the very competitive market of traditional resort hotels. By differentiating itself by providing exclusive spa facilities, Solberri can successfully grab the Blue-ocean market, namely the profitable and rapidly-developing market of resort hotels with exclusive spa facilities. Finally, refurbishing the hotels can improve Solberris profit margin. However, refurbishing all the remaining hotels simultaneously is beyond Solberris financial ability. Its recommended that Solberri refurbish only three hotelstwo Superior and one Super Plus.Refurbishing the Super Plus hotels is riskier since there is no previous experience and the refurbishment will need to close permanently 15 rooms in each hotel. But if Solberri only refurbish Superior hotels, in a short time, there will be a gap in middle-priced hotels, which is unfavorable to the companys strategic development. Proposal C is to acquire an additional resort hotel costing 24 million. The expected NPV is 39. 2 million (Appendix 2. 3). Besides, the breakeven occupancy level is 60% (Appendix 2. 4), which is quite easy to achieve. So Proposal C seems profitable with reasonable risk.However, the initiate cost is too large as its for only one hotel. Compared with Proposal B, its too risky for Solberri in its first year with such good performance. Proposal D is to invest in environmentally friendly initiatives including the installation of solar panels costing 6 million and other environmental initiatives costing 9 million. Though investing in these initiatives cannot generate profits for the company directly, it can help establish Solberri as a socially responsible company which wi ll be positive to its image. But funds are so limited that investing in all these in unrealistic.Its recommended that Solberri invest in the solar panel project first since it can produce cost savings of 0. 6 million per year and defer the others. Loan covenant restriction The 20 million loan negotiated at the end of 2007 has loan covenants restricting the companys further loan financing within 2 years from December 2007, resulting in a probable capital shortage for its future development. Solberri can try negotiating with the bank for removal of restriction by showing them the latest forecast figures and the high level of bookings. However, the good performance of only one year wouldnt be convincing enough to the bank.Solberri can also try refinancing by issuing additional stocks through public offering or private placement. However, due to the relatively high standard and costly registration of public offering, private placement is preferable. With low threshold for issuing, priva te placement is feasible for Solberri whose business just began to pick up after slow seasons. With the good performance this year, its probable that the Solberri will attract strategic investment from institutional investors via private placements to ensure its future development. The poor share price and vulnerability of SolberriRECOMMENDATION Customer service and related HR issues. It is recommended that Solberri immediately work out a plan for recruitment and training, to ensure job fit and effective training among all employees. Employees who cant provide the high standard of service will be refused or assigned to non-facing-customer positions. Moreover, Solberri should set up appropriate motivation mechanisms such as bonus and vacation rewards. It is also recommended that Solberri enlarge its long-term employee proportion by training some short-term employees to be skillful long-term ones.In this way, more employees will cultivate a sense of responsibility and can handle the p revious temporary employees work in non-peak season. Ethical issues Its recommended that Solberri compensate for employees overwork. In the long run, the company needs to enlarge its senior employee reserve. Its recommended that Solberri abandon its controversial tips distribution and set up a bonus system for non-facing customer employees to make up their income difference. Forecast cash surplus investment issueIts recommended that Solberri spend its forecast cash surplus on Proposal B to refurbish and extend the spa facilities at two Superior hotels and one Super Plus hotel, which costs 18 million in total. Since its just the first year Solberri has performed so well in these years, its better for it to be conservative towards investment. Its also recommended that Solberri invest in the installation of solar panels at all 12 hotels costing 6 million and postpone other environmentally friendly initiatives due to its limited funds. These two plans will result in 6. 9 million cash re tained (Appendix 2. ), which will help improve the liquidity of Solberri. . Loan covenant restriction It is recommended that Solberri try to negotiate with the bank for removal of the restriction. If its not workable, Solberri could try seasoned equity offering to refinance either by public offering or private placement, while private placement seems to be most feasible for Solberri and thus is highly recommended. If external financing doesnt work, it is highly recommended that Solberri try all means to control its costs. The poor share price and vulnerability of Solberri ? CONCLUSIONSolberri is now at a crucial time since its the first time it has had such good performance in these years. It is now facing several important issues. The most important ones are how to solve the poor customer service problem and which investment proposal to choose for its future development to increase the occupancy level for all the hotel rooms. It is believed that the analysis and recommendations abo ve can serve as useful references for its decision-making. Solberri has to differentiate itself in the market through a shift by showcasing its spa facilities as its forefront in capturing holiday makers.With a change in visa regulations in Europe Solberri may opt to pay more attention to its local clients by offering the day use of the hotels services and facilities during non-peak seasons. To position itself as a holiday resort hotel, there should be a refurbishment of Solberris hotels to Premier standards ? SWOT ANALYSIS STRENGTHS Good reputation with a long history Proven track record of range of spa facilities Successful refurbishment program Many of long-term employees have worked for Solberri for over 10 years with rich experience. Stable co-operation with several travel agents. Experienced board directors. High sense of Corporate Social Responsibility( 1 hotel won a bronze award in the Green Tourism business awards, 2007 High level of bookings for Peak season 2008 with large cash surplus forecast WEAKNESS Outdated information technology systems. Restrictive loan covenant. Difficulty in enforcing agreed quality service levels. Declining share price compared to 2002 Poor customer service with disappointing customer feedback. Low level of repeat booking. Lack of motivation of short-term employees. Poorly structured financial planning. Resignation of Finance Director. OPPORTUNITIES High level of bookings and a forecast cash surplus of 59 million which can be used for further expansion, refurbishment program, paying dividends, and(or) meeting CSR by investing in environmentally friendly initiatives Huge potential market for Spa service Pricing structure changes to boost occupancy levels Effective use of variety of media to generate more sales THREATS External completion from other hotel industries Understaffing and poor service to meet the high level booking that could impact reputation Resistance from Competitors having state of art information technolo gy can be market leaders. Fall in spa revenues of one premier hotel due to a rival business operated by an ex-manager. Difference of opinion amongst management staff may delay the strategy implementation. WORKINGS 2. 1. 1 Investible surplus 59 million is cash generated from operations before finance costs, tax and dividends, which should be deducted. Besides, the additional operation cost incurred by human resources management should also be deducted in order to get the available cash for investment. 2. 1. 2Cost of financeS. No. AmountRate of InterestDetailsDuration for CYInterest Cost a. 12 m10%Oct- Dec 073 months0. 3 m b. 6 m8%Repayable in Sep 20101 yr0. 48m c. 15 m11%June 20121 yr1. 65m d. 20 m10%Jan-2008 to Dec 149 mths1. 5m Total3. 93 m Notes a. 12 million loan at 10% repayable in December 2007 -As its repayable date is in December 2007, the interest expense incurred in this accounting period is only for three months (October 2007 to December 2007). 12 million*10%*3/12 = 0. 3 million b. 6 million loan at 8% repayable in September 2010 -6 million*8% = 0. 48 million c. 15 million loan at 11% repayable in June 2012 -15 million*11% = 1. 65 million d. 20 million loan at 10% beginning in January 2008 and repayable in December 2014 -As this loan began in January 2008, the interest expense incurred in this accounting period is only for nine months (January 2008 to September 2008). 20 million*10%*9/12 = 1. 5 million 2. 1. 3 Tax expense As stated in the case, the post-tax profit for the year ended September 2008 will be 27 million. Based on the tax rate of 32%, the taxable income = 27 million/(1-32%) = 39. 7 million . Therefore, the tax expense = 39. 7 million*32% = 12. 7 million 2. . 4 Dividends In 2007, Solberri made a profit of 5 million and paid 2 million for dividends, which equals a dividend per share of 0. 083. Its recommended that Solberri double the DPS this year, making the total dividends expenditure as much as 4 million. 2. 1. 5 Additional operation co st As is mentioned before, the high occupancy level this year will incur additional operational cost due to the employee recruitment, training and motivation. It estimated to be around 7. 5 million based on an estimated 12% increase compared with 2007 when the staff costs were 62 million. Cash Available for Investment( in million)Investible surplus( before deduction)= 59. 00 Less Interest cost 3. 93 Tax expense 12. 7 Dividend expense 4. 00 Additional operation cost 7. 5 Net surplus= 30. 9 2. 2. Total cost for all four investment proposals ProposalInvestment cost per hotelNumber of hotelsTotal cost A9 million436 million B6 million848 million C****24 million D15 million Total cost123 million **Total cost for Proposal C = acquiring cost + refurbishing cost + marketing cost = 5 million +16 million+3 million = 24 million Total cost for Proposal D = 15 million . 3. Expected NPV of Proposal C As is shown in the case, when occupancy level equals 95%, the NPV will be 100. 0 million. When i ts 80%, the NPV will be 35 million. When its 50%, the NPV will be 25 million. And their probabilities are 25%, 60% and 15% respectively. Therefore, the weighted average NPV = 100. 0 million*25% + 35. 0 million*60% +(-25 million)*15% = 42. 2 million However the marketing cost of 3 million is excluded in the above NPV, so the expected NPV of Proposal C = 42. 2 million 3 million = 39. 2 million 2. 4. Breakeven occupancy level of Proposal CWhen occupancy level equals 95%, the NPV will be 97 million. When its 50%, the NPV will be -28 million. Thus, when the occupancy level decreases by 1%, the NPV will decrease by 2. 78 million. 97 million (-28 million) / (95-50) = 2. 78 million In this way, when the occupancy level changes by about 35% (97/2. 78), the NPV will decrease to zero. Therefore, the breakeven occupancy level is around 60%. 2. 5 Estimated cash retained Estimated cash retained = cash available for investment investment costs = 30. 9 million 24 million = 6. 9 million Compariso n between Solberri and Shangri-la Asia Limited with the DuPont Model 3. DuPont Model of Solberri 2007 Return on Equity (ROE) 0. 0568 Return on Assets (ROA) 0. 3086? Equity Multiplier (EM) 1. 8409 Profit Margin 0. 0314? Total Asset Turnover 0. 9815 1 /(1Debt Ratio 0. 4568) Net Income/Net Sales Net Sales/Average Total Assets Total Liabilities/Total Assets 3. 2 DuPont Model of Shangri-la Asia Limited 2007 Return on Equity (ROE) 0. 1046 Return on Assets (ROA) 0. 1029? Equity Multiplier (EM) 1. 016 Profit Margin 0. 3069? Total Asset Turnover 0. 3354 1 /(1Debt Ratio 0. 0159) Net Income/Net Sales Net Sales/Average Total Assets Total Liabilities/Total AssetsComparison between Solberri and Shangri-la Asia Limited with the DuPont Model 3. 1 DuPont Model of Solberri 2007 Return on Equity (ROE) 0. 0568 Return on Assets (ROA) 0. 3086? Equity Multiplier (EM) 1. 8409 Profit Margin 0. 0314? Total Asset Turnover 0. 9815 1 /(1Debt Ratio 0. 4568) Net Income/Net Sales Net Sales/Average Total Assets Tot al Liabilities/Total Assets 3. 2 DuPont Model of Shangri-la Asia Limited 2007 Return on Equity (ROE) 0. 1046 Return on Assets (ROA) 0. 1029? Equity Multiplier (EM) 1. 016 Profit Margin 0. 3069? Total Asset Turnover 0. 3354 1 /(1Debt Ratio 0. 0159) Net Income/Net Sales Net Sales/Average Total Assets T