Bong Sopheap Hotels plc owns a successful chain of hotels.

The company is considering diversifying its activities through the construction of a theme park near London. The theme park would have a mixture of family activities and adventure rides. Bong Sopheap has just spent US$230,000 on market research into the theme park, and is encouraged by the findings. The theme park is expected to attract an average of 15,000 visitors per day for at least four years, after which major new investment would be required in order to maintain demand. The price of admission to the theme park is expected to be US$18 per adult and US$10 per child. 60% of visitors are forecast to be children. In addition to admission revenues, it is expected that the average visitor will spend US$8 on food and drinks, (of which 30% is profit), and US$5 on gifts and souvenirs, (of which 40% is profit). The park would open for 360 days per year. All costs and receipts (excluding maintenance and construction costs and the realizable value) are shown at current prices; the company expects all costs and receipts to rise by 3% per year from current values. The theme park would cost a total of US$400 million and could be constructed and working in one years time. Half of the US$400 million would be payable immediately, and half in one years time. In addition working capital of US$50 million will be required from the end of year one. The after tax realizable value of fixed assets is expected to be between US$250 million and US$300 million after four years of operation. Maintenance costs (excluding labor) are expected to be US$15 million in the first year of operation, increasing by US$4 million per year thereafter. Annual insurance costs are US$2 million, and the company would apportion US$25 million per year to the theme park from existing overheads. The theme park would require 1,500 staff costing a total of US$40 million per annum (at current prices). Bong Sopheap will use the existing advertising campaigns for its hotels to also advertise the theme park. This will save approximately US$2 million per year in advertising expenses. As Bong Sopheap has no previous experience of theme park management, it has investigated the current risk and financial structure of the closest UK theme park competitor, Oun Sopheap plc. Details are summarized below. Oun Sopheap plc, summarized balance sheet US$ million 1,440 570 (620) 1,390 400 530 930 460 1,390

Fixed assets (net) Current assets Less current liabilities

Financed by: US$1 ordinary shares Reserves

Medium and long term debt

Other information: i. Bong Sopheap has access to a US$450 million Eurosterling loan at 75% fixed rate to provide the necessary finance for the theme park. ii. US$250 million of the investment will attract 25% per year capital allowances on a reducing balance basis. iii. Corporate tax is at a rate of 30%.

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The average stock market return is 10% and the risk free rate 35%. Bong Sopheaps current weighted average cost of capital is 9%. Bong Sopheaps market weighted gearing if the theme park project is undertaken is estimated to be 614% equity, 386% debt. Bong Sopheaps equity beta is 070. The current share price of Bong Sopheap is 148 pence, and of Oun Sopheap 386 pence. Oun Sopheaps medium and long term debt comprises long term bonds with a par value of US$100 and current market price of US$93. Oun Sopheaps equity beta is 145.

Required: Prepare a report analyzing whether or not Bong Sopheap should undertake the investment in the theme park. Your report should include a discussion of what other information would be useful to Bong Sopheap in making the investment decision. All relevant calculations must be included in the report or as an appendix to it. State clearly any assumptions that you make.