Read the information below and then answer the questions that follow.
Drake Hotels PLC owns 20 budget hotels in the UK. Each one is located in a different
city. The industry is very competitive and Drake’s managers all
...
Read the information below and then answer the questions that follow.
Drake Hotels PLC owns 20 budget hotels in the UK. Each one is located in a different
city. The industry is very competitive and Drake’s managers all have an objective to
help the business to be as efficient as possible.
Drake Hotels PLC’s operating profit for the financial year 2019–20 was £18 million.
Last month the company appointed a new Chief Executive, Mary Myers, to increase
the profitability of the business. Mary was previously the Marketing Manager of an
upmarket hotel chain.
Mary is already considering an investment proposal for a luxury hotel in Oxford. This
hotel would target overseas visitors who might want to visit the city. Drake Hotels has
found a suitable building but needs to invest to develop it.
Appendix A Investment appraisal results for the proposed investment into a new
hotel in Oxford (based on net inflows for first eight years).
Average rate of return 12% per year
Net Present Value £25 million
Source: Chief Executive
Appendix B Sensitivity analysis for the new Oxford hotel investment proposal
Two possible changes in the economy that might affect
the investment appraisal results in Appendix A
Estimated
probability of this
change happening
The value of the pound against other currencies is 10%
higher than originally forecasted. 20%
The average GDP growth in overseas countries is 1.5%
higher than originally forecasted. 30%
Source: Chief Executive
Appendix C Selected financial data for Drake Hotels PLC
£ million as at
1 May 2020
Current assets 15
Current liabilities 18
Total equity 170
Non-current liabilities 2803
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Appendix D Forecasted data for Drake Hotels PLC’s new Oxford hotel box
investment proposal
Initial investment required
Estimated income elasticity of demand
£20 million
+2
Percentage of customers visiting from overseas 70%
Estimated cost of borrowing for this investment 8% per annum
Appendix E Room bookings by month and day of the week in Drake Hotels
PLC’s budget hotels 20194
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0 1 . 1 Using the data in Appendix C, calculate the following ratios for Drake Hotels PLC in box
2020.
[6 marks]
Current ratio
Gearing ratio
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