Unihost Industry Analysis The Canadian Case Study

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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

...

The company's debt load increases significantly in the first two years, but reduces once the convertible bonds are taken as equity. This leverage significantly increases the earnings per share over the course of three years, in part because the company earns greater economies of scale on its expenses. It is assumed that the debt is taken in two issues, with the convertibles issued first, followed by the debentures. This causes the liabilities to increase twice in the first two years. By the time the new capacity is coming on stream, the company will be enjoying high profits and…

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