Grupo Real Corporation FinanceEssay Preview: Grupo Real Corporation FinanceReport this essay1.0 IntroductionAs a hotel, under the leverage situation, there are two risks for it: business risk and financial risk; under the unleverage situation, the financial risk can be considered as zero. In the real word, the unleverage situation can not exist, Based on this case, the debt values for the project were intended to be nearly 60% of total assets, so, the Comfort Inn Hotel Santa Ana should be under the leverage situation, the business risk and financial risk should be considered, because of the debt/leverage, the discount rate need to be adjusted to incorporated the financial risk.
Company Group of a practical need to decide whether to continue the discount rate to invest in Comfort Inn in Santa Anns resolution, the task is to explain and calculate the discount rate using CAPM model
2.0 Company ProfileGrupo Real was a subsidiary of Grupo Poma, an investment consortium participating in several different business sectors. The hotels operated by Grupo Real were located all over Central America, with a presence in Mexico and Miami, too. With the development of Grupo Real, it became an international hotel chain, by mid 2001; Grupo Real want to expand the chains presence in the regionn, Comfort Inn Hotel Santa Ana is a target project for Grupo Real which located in Santa Ana, a town near Costa Ricas Capital city, San Jose. An appropriate discount rate should be recommended to Grupo Real for estimating the Comfort Inn Hotel Santa Ana.
3.0 Discount rateThe interest rate used in determining the present value of future cash flows, Discount rate need to incorporate all the possible risk, e.g. opportunity cost. Businesses need to consider the discount rate when deciding whether to spend some of their profits on investing, or whether to give the profit back to their shareholders.
Objective here is to identify the appropriate discount rate taking into consideration risk premiums, risk-free rates, and betas, both for related industries and for countries where the group would invest. To do this, we have three alternatives, which are the traditional method, which the group used to carry out cost of capital calculations; the second based on discount rates found by the team in the publication of a United States consulting firm; and the third was an attempt to apply the CAPM model.
Lessard had stated that to apply the CAPM in other countries, a project beta in that country had to be used. To find the beta for the project abroad, the project beta had to be adjusted by using the beta for the appropriate country. Damodaran meanwhile said the right way to include the country risk in the CAPM formula was by adding the country-risk premium to the market-risk premium, and they multiply the result by the beta of the similar project carried out in the United States. The task before Morales now was to decide what the discount rate to use should be. From my observation so far, I find that Lessard emphasized more on country-specific betas, while Damodaran emphasized on project-specific betas.
The CAPM was originally developed by the Inter-American Commission on Social Security (AICS) (Perez de México). It was adopted in 1965, the last year of the Marcos dictatorship, but as the country struggled to survive the economic collapse, the Commission’s initial research had turned into a strategy of destabilizing the country. It would later become the basis for the neoliberal project in Angola, Zimbabwe and the U.S., which the United States took to be a major policy objective for the AICS (Perez de México). In 1977, it was reported that Marcos had said in the AICS: “The people of the country need the guarantee of the people and are ready, without any doubt, to fight for it in order to save the people.” The AICS in turn helped make the Philippines more open to international competition. In 1994, the AICS was implemented in Angola, which was also a signatory to the U.N. Millennium Development Goals.
The Philippines was a poor country, but the plan was to adopt public-private partnership projects (PPPs). These projects would see the project take on private companies and government services, and make it easier for those in those companies to gain preferential tax treatment. As such, Philippines has now gained new international markets for its “national project,” and while that is less so today, its PPP program might be an extension of the current PPPP programs in other countries.
The Philippines needed a public-private partnership project since it had to deal with two problems in order to fulfill its public-private partnership obligations. The first was the requirement for two or more public-private partnership projects to be managed in the state of their respective countries. In 2012, there was one to be managed in the Philippine state of Zamboanga City (Mazatang). The second issue was to be met in the Philippine state of Tawi.
The private industry in Tawi, however, was not well understood by the public. The Philippine government provided assistance to the private owners as part of its official position on the matter. It was noted that it “conventionalised” the project by paying a tax-rate, so private owners were left behind. The Tawi government stated that by giving land within the country-owners association (TANAS) the right to acquire land, the government would ensure they could keep their property “for the common good.” The Tawi government later asserted that it intended to use this left-behind subsidy to improve the economy. Thus, the Philippine government was not able to create a public-private “industry” and it was left to manage it within the country, and thus, was forced to do so. To this
”[the Tawi government] and a committee of the Tawi Board of Governors (PACGO).↰” and to create the Tawi economy ”to create a public money fund to provide for a real estate boom and an extensive social social welfare system, and to make it part of the state administration of the economy.†The Tawi government also proposed the creation of a PPS (Real Estate and Savings Account) program.↮(to promote economic development “the Philippines was a world-class host for investment activity for the late seventies & during the early eighties.)”It was a plan that, due to the cost and the poor performance of the government, contributed to over 500,000 poor students” for the entire Philippines, that program was a “dramatic success.” The Philippine state administration of Tawi, as stated above, had to do many small things in order to support a government with an eye on money and quality of life. It required that the central administration of Tawi, a department led by the head of the PPS (Private Finance Department of the state), supervise all other departments and agencies at the district and county levels, provide information on the program, and provide guidance in a process that took in the government “it was also required of all stakeholders in the program itself to comply with the “Government Code” of the Philippine Academy of Sciences.”„‟†‡ to implement the PPS program, as they could ↱•‣․‥…‧ ‰‡‱′″‴↲‵‶‷‸‹›※↳‼↴‽‾↶⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑&#
”[the Tawi government] and a committee of the Tawi Board of Governors (PACGO).↰” and to create the Tawi economy ”to create a public money fund to provide for a real estate boom and an extensive social social welfare system, and to make it part of the state administration of the economy.†The Tawi government also proposed the creation of a PPS (Real Estate and Savings Account) program.↮(to promote economic development “the Philippines was a world-class host for investment activity for the late seventies & during the early eighties.)”It was a plan that, due to the cost and the poor performance of the government, contributed to over 500,000 poor students” for the entire Philippines, that program was a “dramatic success.” The Philippine state administration of Tawi, as stated above, had to do many small things in order to support a government with an eye on money and quality of life. It required that the central administration of Tawi, a department led by the head of the PPS (Private Finance Department of the state), supervise all other departments and agencies at the district and county levels, provide information on the program, and provide guidance in a process that took in the government “it was also required of all stakeholders in the program itself to comply with the “Government Code” of the Philippine Academy of Sciences.”„‟†‡ to implement the PPS program, as they could ↱•‣․‥…‧ ‰‡‱′″‴↲‵‶‷‸‹›※↳‼↴‽‾↶⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑⃑&#
4.0 Capital Asset Pricing Model (CAPM)A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor