HFT 6477 Summer A 2012 Florida International University

Jasinet CobleCraig WrightLillian VitaleDillon Burke

Nuria GutierreDaniel Mayer

Introduction

• IHG is a holding company• The principal activities: hotels and resorts,

with franchising, management, ownership and leasehold interests in over 4,400 establishments, with more than 658,000 guest rooms in over 100 countries and territories worldwide.

7 Unique Brands

The pipeline totaled 1,144 hotels (180,484 rooms)

Regions

• Americas• Europe• Asia• Middle East and Africa• Greater China

Cost of Equity (CAPM)

• kE = Rf +(Km – Rf)• Rf = return on the risk free asset• = Beta (Computed 1.42 – Please see Excel

attachment)• Km = return on the market portfolio • kE = .04 + 1.42(.12 - .04)• kE = .1536 or 15.36%

Cost of Debt

• kD = Interest Expense/Interest Bearing Debt (Total long term plus total short term debt)

• kD = 56,000,000/691,000,000• kD = .0810 or 8.10%

Weighted Average Cost of Capital (WACC)

• WACC = kA = (1 – L)kE + L(kD) (1 – T)• L = Total Liabilities/Total Assets• L = 2,413,000,000/2,968,000,000• L = .8130 or 81.30%• kE = Cost of Equity• kE = .1536 or 15.36%• kD = Cost of Debt = Interest

Expense/Interest Bearing Debt• kD = .0810 or 8.10%

WACC (Cont.)

• T = Tax Expense/Earnings before taxes• T = 81,000,000/544,000,000• T = .1489 or 14.89%• WACC = kA = (1 – L)kE + L(kD) (1 – T)• kA = (1 - .8130)(.1536) + (.8130)(.0810)(1 - .1489)• kA = .0848 or 8.48%

Adjusted Operating Cash Flows

• Net Income + Depreciation + Interest • Net Income = 473,000,000• Depreciation = 99,000,000• Interest = 8,000,000

• AOCF= 473,000,000 + 99,000,000 + -8,000,000• AOCF= $580,000,000

Estimated Growth Rates

• Year 1 (2012) 4% - increased revenues and dividends paid in past 2 years

• Years 2 (2013) - 4 (2015) - Growth rate change increases of 2% each year:– 120 hotel expansion starting at the end of 2013– 26% portfolio increase• 100 healthy hotels in US • 20 luxury in China

Estimated Growth Rates cont…

• Year 2 8% - hotels will start expanding at the end of year – Cash flows will be minimal in this short time

• Year 3 10% - expansion continues & new hotels are being established– US expansion targets middle class – Europe & US

recession – Chinese expansion targets domestic Chinese travelers –

booming economy • Year 4 12% - expansion continues, larger cash flows…

• Current value of share: $29.48• Current price of share: $23.35 (6/10/12)

• We recommend potential investors to purchase IHG shares!

Valuation

• IHG is financed heavily with equity

Any Questions?