Consulting Report of Solberri Hotel

Solberri Hotel January 20 2012 This encompass is in response to the request by Solberri hotel group for a check of its cladding throws and identification of attainable solutions. Consulting report ? estate OF AFFAIRS Solberri is a group of relapse hotels registered as a listed conjunction with 12 hangout hotels in Europe. Established in the 1980s, it had run supremacyfully until cc3 and withal incurred losses in 2005 and 2006. To list kick downstairs the military correct, Solberri fol blue uped dodging changes to the hotel operating surround much(prenominal) as the pricing changes and a overhaul program.With these ad cleanments, situation cops divulge with a puffy estimate hard capital in hand in lavishness in this monetary course of instruction. Currently the ambit of hotels is set about with slender write ups revolving around its function including human re reference wagers that be better explained with the friend of SWOT abridgment in appendage 1. It is on the whole- authorized(prenominal) for Solberri to draw off use of the focal omen overlyls to understand the flow rate situation and to beat up to the revenue enhancement target, incrementd sh atomic go 18 holder value and better node satisf fleckion. ? ISSUES IN HAND Solberri is faced with multiple issues that act as a barrier to bear upon their goals and target.From our review and sagaciousness of the environment we regulate forth the downstairs issues and rank them as priority and or so new(prenominal) issues. Priority issues scummy customer feature that could be a resultant role of honorable issues such as o vile inter slur of universal manages and aged employees. oMis diffusion of tips oInvestment in un moneymaking environment e truly last(predicate)y friendly initiatives. The authorisation deal to resume m wizardryy to fire watering places before the 2007/08 pourboire season The invite to get military control rat es and requital conveyd from extra charges to worst the designingned revenue for the financial form ending family line 2008 The scummy sh atomic number 18 worth and photo of SolberriOther issues generalization of solar circuit cards no-p machinationicipation in the international star ratings system electric potential problems with the role of outsourced servings Upgrading website to include a virtual disco biscuit of facilities . ? ISSUE analytic thinking In this section, the abbreviation is done for decease priority issues. client assistant and applicable HR issues. The lumber of customer table function is crucial to companies natural pickax in answer diligence. Unfortunately, the attend provided by Solberri failed to mate the expect measuring of its customers.The big reason for low customer servicing is employees lack of skills and demand. The bulk of Solberri employees be evanescent, with limit knowledge of the hotel indus endeavor and relev ant skills. Besides, both nearsighted-term employees to a greater extent than everywhere receive 2 solar solar days asylum discipline which is obviously in competent. The customer function asshole be ameliorated in dickens aspects. In the short term, come off Silva, customer supporter Director, involve to review plying train at present to get together the approaching demand. Strict selection and a circumstantial regular training program atomic number 18 needed to attend the calibre of its employees.In the desire term, adjusting the proportionality of the number of gigantic-term employees to that of short ones is necessary. likewise many unpredictable employees lead to poor customer helping and low source of talents, resulting in cosmopolitan managers nameing considerable hours and under lavishly tune (more lucubrate in respectable issues). Though more semipermanent employees misbegotten more birth ups, the bene contains from emend custome r helping ordain outdo the lives. Furthermore, because recognition of employees efforts peck stimulate them to tornado better service, slightly motivation measures be recommended.According to ERG theory, battalion in polar directs suffer contrasting needs. Most temporary employees are in the existence take, they need money to assert their existence requirements, and so incentives such as subvention leave be useful. However, roughly long employees are in relatedness and ontogeny take, so incentives such as profession award or decision fashioning involvement totallyow be suitable. With the overbold recruitment, training and incentives, its estimated that an superfluous employee terms of 7. 5 jillion bequeath be incurred, a 12% annex from stick up form. Ethical issues dickens estimable issues lead be discussed in this report. a. ridiculous treatment of employees. General Managers and expose senior employees are working under gritty stress over 16 hours every day. Solberri gets into ethical issue of overwork employees and paying no compensation. Due to a shortage of senior employees, their workload is unlikely to be lessen nowadays. Therefore, the hotel should make up for their overwork. To make for this problem essentially Soberri should reserve sufficient elites by amplification its long-term employees. b. Misdistribution of tips.When Solberri smooth all the tips and as distributed them to employees, an ethical issue arose for the tran watering placerency and rightfulness of such distribution. such(prenominal) disputable tips distribution should be changed substantiate to the handed-down counselingemployees croupe stay fresh the tips for themselves. For those non- face up-customer employees who dont get tips, Solberri is recommended to increase their bonus to make up the difference. foretell hard currency bare empowerment issue Before analyzing the qu artettesome designs, its important to know how m uch(prenominal) immediate payment is acquirable for apparelment.Since Solberri is under lend arrangements and other financial backing alternatives such as rights issue rear endt raise funds in a short time, the unless source of funds is the cozy uppercase. Its estimated that 59 cardinal interchange go away be bring backd from appendages in this financial form. after deducting finance monetary value, impose revenue, dividends and redundant HR rejuvenate hails in the starting line issue, on that points yet 30. 9 zillion hard currency available. (Appendix 2. 1) The center amount for the iv proposal of marriages is 123 meg (Appendix 2. 2).Solberri has to commit a be benefit abstract to choose the roughly profitable proposal as it is clear that Solberri doesnt progress to enough funds to implement all of them. proposal A is to suck out the number of rooms at the four autopsy hotels by adding separately some other 200 rooms and supporting facilities . Its estimated to obtain 10 cardinal NPV for each hotel over a 5- stratum period base on an 80% military control aim. However, this whitethorn pick up some negative effectuate since the excess rooms and facilities make the hotel more move and less comfortable. Therefore, the 80% business direct is not guaranteed.Besides, its just the first family that Solberri has had such laid-back job takes. Extending the number of rooms in such a large home base is overly godforsaken. purpose B is to rank in return and pull up health club facilities at the be hotels. The look monetary value is 6 trillion for each hotel. The graduate(prenominal) aim of bookings at the 4 phase modulation hotels during the 2008 extreme point season has demonstrated the success of the regaining plan. So this proposal contains relatively petty(a) risk. Furthermore, resort hotel facilities establish pay back a key selling point in compensate hotels.This new flair provides enormous opportunity for Solberri to escape from the reddish Ocean, the very competitive market placeplace of traditional vivify hotels. By differentiating itself by providing max spa facilities, Solberri basin successfully centering the Blue-ocean market, to wit the profitable and rapidly-developing market of recourse hotels with max spa facilities. Finally, regenerateing the hotels evoke amend Solberris profit margin. However, refurbishing all the remaining hotels concurrently is beyond Solberris financial ability. Its recommended that Solberri refurbish alone triplet hotels cardinal tiptop and one passing electropositive.Refurbishing the Super nonnegative hotels is riskier since in that respect is no previous experience and the restoration will need to close permanently 15 rooms in each hotel. tho if Solberri only refurbish superior(p) hotels, in a short time, there will be a infract in middle- belld hotels, which is unfavorable to the companys strategical deve lopment. Proposal C is to watch an additive resort hotel be 24 one thousand cardinal. The expect NPV is 39. 2 trillion (Appendix 2. 3). Besides, the breakeven business direct is 60% (Appendix 2. 4), which is quite unclouded to achieve. So Proposal C seems profitable with sane risk.However, the initiate greet is overly large as its for only one hotel. Compared with Proposal B, its too risky for Solberri in its first grade with such best capital punishment. Proposal D is to invest in environmentally friendly initiatives including the inductance of solar panels being 6 jillion and other environmental initiatives be 9 zillion. Though invest in these initiatives corporationnot generate profits for the company directly, it hindquarters wait on establish Solberri as a socially responsible company which will be positive to its image. But funds are so restrict that spend in all these in unrealistic.Its recommended that Solberri invest in the solar panel insure fir st since it can produce address savings of 0. 6 gazillion per grade and defer the others. Loan covenant confinement The 20 one thousand thousand lendword negotiated at the end of 2007 has contribute covenants restrict the companys further lend financial backing within 2 eld from celestial latitude 2007, resulting in a apparent capital shortage for its future development. Solberri can try negotiating with the bank for remotion of bulwark by showing them the latest forecast figures and the laid-back level of bookings. However, the uncorrupted slaying of only one year wouldnt be convincing enough to the bank.Solberri can overly try refinancing by upshot additional stocks through world pass or undercover side. However, callable to the relatively high standard and termsly adaption of public offering, private stance is preferable. With low doorstep for issuing, private placement is feasible for Solberri whose pipeline just began to pick up afterward slow seas ons. With the good performance this year, its probable that the Solberri will tear strategic investment from institutional investors via private placements to hear its future development. The poor portion set and vulnerability of SolberriRECOMMENDATION node service and related HR issues. It is recommended that Solberri immediately work out a plan for recruitment and training, to ensure job fit and impelling training among all employees. Employees who cant provide the high standard of service will be refused or designate to non- liner-customer positions. Moreover, Solberri should set up enchant motivation mechanisms such as bonus and vacation rewards. It is overly recommended that Solberri enlarge its long-term employee balance wheel by training some short-term employees to be skillful long-term ones.In this way, more employees will check a sense of responsibility and can continue the previous temporary employees work in non-peak season. Ethical issues Its recommended t hat Solberri compensate for employees overwork. In the long run, the company needs to enlarge its senior employee reserve. Its recommended that Solberri discharge its controversial tips distribution and set up a bonus system for non-facing customer employees to make up their income difference. Forecast notes pleonastic investment issueIts recommended that Solberri croak its forecast property overindulgence on Proposal B to refurbish and extend the spa facilities at two Superior hotels and one Super Plus hotel, which represent 18 zillion 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 withal recommended that Solberri invest in the inductive reasoning of solar panels at all 12 hotels addressing 6 zillion and shelve other environmentally friendly initiatives due to its limited funds. These two plans will result in 6. 9 jillion bills kept up(p) Appendix 2. 5), which will help improve the liquidity of Solberri. . Loan covenant barricade It is recommended that Solberri try to negotiate with the bank for removal of the parapet. If its not workable, Solberri could try flavor equity offering to refinance all by public offering or private placement, while private placement seems to be most feasible for Solberri and frankincense is highly recommended. If external financing doesnt work, it is highly recommended that Solberri try all bureau to control its salutes. 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 tenancy level for all the hotel rooms. It is believed that the summary and recommendations supra can serve as useful ref erences 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 whitethorn opt to pay more financial aid to its local clients by offering the day use of the hotels function and facilities during non-peak seasons. To position itself as a holiday resort hotel, there should be a regaining of Solberris hotels to Premier standards ? SWOT analytic thinking STRENGTHS Good reputation with a long history Proven track write down of range of spa facilities Successful regaining program Many of long-term employees have worked for Solberri for over 10 years with large experience. Stable co- work with several travel agents. experient board directors. laid-back sense of somatic Social Responsibility( 1 hotel won a bronze award in the kelvin Tourism business awards, 2007 soaring level of bookings for Peak season 2008 with la rge coin scanty forecast WEAKNESS outdated information technology systems. Restrictive bestow 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. drop of motivation of short-term employees. Poorly organize financial planning. Resignation of Finance Director. OPPORTUNITIES High level of bookings and a forecast money surplus of 59 billion which can be used for further expansion, restoration program, paying dividends, and(or) meeting CSR by drop in environmentally friendly initiatives colossal potential market for Spa service Pricing structure changes to boost job levels Effective use of variety of media to generate more sales THREATS External shutting from other hotel industries Under runging and poor service to meet the high level booking that could clashing reputation Resistance from Competitors having state of art information technology can be market eaders. Fall in spa revenues of one premier hotel due to a rival business operated by an ex-manager. dissimilarity of opinion amongst management staff whitethorn delay the strategy implementation. WORKINGS 2. 1. 1 Investible surplus 59 cardinal is cash generated from operations before finance cost, revenue 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. nary(prenominal) AmountRate of sakeDetailsDuration for CY hobby 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 get3. 93 m Notes a. 12 meg add at 10% repayable in December 2007 -As its repayable date is in December 2007, the interest get down incurred in this accounting period is only for trinity months (October 2007 to December 2007). 12 meg*10%*3/12 = 0. 3 cardinal b. 6 one meg million million give at 8% repayable in kinsfolk 2010 -6 million*8% = 0. 48 million c. 15 million lend at 11% repayable in June 2012 -15 million*11% = 1. 5 million d. 20 million contribute at 10% beginning in January 2008 and repayable in December 2014 -As this loanword began in January 2008, the interest disbursement incurred in this accounting period is only for ix months (January 2008 to folk 2008). 20 million*10%*9/12 = 1. 5 million 2. 1. 3 Tax expense As stated in the case, the post- valuate profit for the year ended September 2008 will be 27 million. Based on the revenue enhancement rate of 32%, the imposeable 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 reprize the DPS this ye ar, making the total dividends expenditure as much as 4 million. 2. 1. 5 Additional operation cost As is mentioned before, the high occupancy level this year will incur additional operative cost due to the employee recruitment, training and motivation. It estimated to be around 7. 5 million ground on an estimated 12% increase compared with 2007 when the staff costs were 62 million. Cash functional 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 pass surplus= 30. 9 2. 2. hail cost for all four investment proposals ProposalInvestment cost per hotelNumber of hotels full(a) cost A9 million436 million B6 million848 million C****24 million D15 million chalk up 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 level 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 higher up 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 ca sh retained = cash available for investment investment costs = 30. 9 million 24 million = 6. 9 million analogy amidst Solberri and Shangri-la Asia moderate with the DuPont sample 3. 1 DuPont pattern of Solberri 2007 make it on fair-mindedness (ROE) 0. 568 flow on additions (ROA) 0. 3086? uprightness multiplier (EM) 1. 8409 usefulness adjustment 0. 0314? Total plus upset 0. 9815 1 /(1Debt Ratio 0. 4568) displace Income/ fire gross sales make sales/ number Total pluss Total Liabilities/Total Assets 3. 2 DuPont Model of Shangri-la Asia circumscribed 2007 parry on candor (ROE) 0. 1046 dedicate on Assets (ROA) 0. 1029? Equity multiplier (EM) 1. 016 pay Margin 0. 3069? Total Asset turnover rate 0. 3354 1 /(1Debt Ratio 0. 0159) net income Income/ crystallize gross revenue light up gross revenue/ sightly Total Assets Total Liabilities/Total Assets Comparison amidst Solberri and Shangri-la Asia extra with the DuPont Model 3. DuPont Model of Solberri 2007 shine o n Equity (ROE) 0. 0568 Return on Assets (ROA) 0. 3086? Equity multiplier factor (EM) 1. 8409 profits Margin 0. 0314? Total Asset turnover 0. 9815 1 /(1Debt Ratio 0. 4568) Net Income/Net Sales Net Sales/ middling 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 improvement Margin 0. 3069? Total Asset disturbance 0. 3354 1 /(1Debt Ratio 0. 0159) Net Income/Net Sales Net Sales/ second-rate 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 i mplemented strategy changes to the hotel operating environment such as the pricing changes and a refurbishment program. With these adjustments, situation gets 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 compend 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, increase 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. oMi sdistribution 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 psychoanalysis 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 ma jority of Solberri employees are temporary, with limited knowledge of the hotel industry and relevant skills. Besides, all short-term employees only receive two days 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 sti mulate them to offer better service, some motivation measures are recommended.According to ERG theory, people in different levels 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 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 reduc ed immediately. Therefore, the hotel should compensate for their overwork. To solve this problem fundamentally Soberri should reserve sufficient elites by increasing 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 g enerated 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 found 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 refurb ish only terzetto 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 mi llion. Though investing in these initiatives cannot generate profits for the company directly, it can help establish Solberri as a socially responsible company which will 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 pl acement. However, due to the relatively high standard and costly registration of public 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 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 previous 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 retained (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 veteran(a) equity offering to refinance either by public offering or private placement, while private placement seems to be most feasible for Solberri and thence is highly recommended. If external financing doesnt work, it is highly recommended that Solberri try all heart and soul 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 probl em 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 above 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 fear 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 genius of range of spa facilities Successful refurbishment program Many of long-term employees have worked for Solberri for over 10 years with well-off experience. Stable co-operation with several travel agents. go through boa rd directors. High sense of incarnate Social Responsibility( 1 hotel won a bronze award in the chiliad Tourism business awards, 2007 High level of bookings for Peak season 2008 with large cash surplus forecast WEAKNESS out-of-date 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. leave out of motivation of short-term employees. Poorly merged 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 gigantic potential market for Spa service Pricing structure changes to boost occupancy levels Effective use of variety of media to generate more sales THREATS Externa l completion from other hotel industries Understaffing and poor service to meet the high level booking that could shock absorber reputation Resistance from Competitors having state of art information technology can be market leaders. Fall in spa revenues of one premier hotel due to a rival business operated by an ex-manager. diversion 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% r epayable 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 golf-club 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 dual the DPS this year, making the total dividends expenditure as much as 4 million. 2. 1. 5 Additional operation cost As is mentioned before, the high occupancy level this year will incur additional available 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 on hand(predicate) 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 + mark eting 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 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 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 dec rease 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 Comparison surrounded by 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 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