If the convertibles are taken as equity, the capital structure will be around 28.6% in two years not counting new retained earnings, and this is close to the target capital structure that UniHost has. It is recommended therefore that those two options are undertaken in order to finance the expansion of UniHost. The convertible will need to be more than the $75 million -- more is possible so a this issue should net around $85 million. The company is unable to finance with just equity and convertibles, so some amount of debenture will be required, so it would be difficult for UniHost to undertake its growth strategy and avoid the restrictive covenants that will prohibit it from further growth. Future expansion needs can be met, however, with an equity issue, since the company knows that in today's difficult market it can raise $40 million. Using the two forms of debt therefore allows UniHost to pursue its growth strategy and move close to its desired capital structure.
Appendix a
UniHost -- Cash Flow Projections
1998
1999
2000
Cash Flow from Existing Opertions1
Operating Cash Flow
34011
35371
36786
Cash Flow from New Operations2
Operating Cash Flow
Toronto Hotel
0
Comfort Inns
0
2000
Clarion Strategy
0
13500
20250
Clarion Reflag
0
Total New Operating Cash Flows
0
25125
35875
Capital Expenditures3
New Furniture and Fixtures
-1190
-1237
-1287
Toronto Hotel
-85000
0
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