Introduction
The gaming industry has become extremely lucrative not only in America but in the entire world where sports betting is really loved by the people. The key for success for the gambling complex are location, where the gambling complex is situated to an entertainment joint or an entertainment arena. The second key success for a gambling complex is technology. The technology in this gambling entertainments must be kept fresh through the owner’s contacts with the engineers who build and service this equipment. The owner of World Gambling Inc an entertainment joint and a gambling complex is considering to open up 10 new arcades in a anew city. The new arcades would require about $ 1 million in investment each (Huizinga, Voget, and Wagner, 2018). However, the entertainment arcades would have a loss of $ 200,000 in the first two years and then profits or positive incomes of $ 100000 from the thirds year and a 20% increase in income in the subsequent years. This report aims at advising the owner on the best alternative financing avenue for the gaming arcades considering a 10-year bank loan with an interest of 8%. And a 10 year bonds that would pay 10%.
Financial statements of World Gambling Inc
Income Statement
For the year ended 31 Dec 2019
| Item | $ Millions |
| Revenue | 10 |
| Operating expenses | 5 |
| Taxes | 0 |
| Interest | 1 |
| Net Income | $4 |
Balance sheet
For the Year ended 31sit Dec 2019
| Item | $ Million |
| Assets | |
| Cash | 10 |
| Receivable s | 1 |
| Plant, Property & Equipment | 5 |
| 16 Million | |
| Liabilities & Equity | |
| Payables | 0.5 |
| Stock | 0.5 |
| Retained Earnings | 15 |
| 16 Million | |
Project Financing
Project financing may come in a variety of sources. However, the best and ultimate one depends on the ability of the financing option to produce the best results (Humphreys, 2020). There are very many options for financing the project some of which includes; loans, debentures. Bonds, personal finances and many more. However, the basic steps to financing a project are
- Step 1: identification of the project. In this case, it is financing the Gaming arcade and reviewing their ability to be good investments after the finance activity.
- Step 2: this is determining the project feasibility or ability of the project to have returns after the investment has been put in.
- Step 3: this is the identification of the technology
- Step 4: identification of the sources of finance of the project
- Step 5: mitigate the risk of the project.
Types of project financing –Bond Financing and Debt Financing
There are two types of project financing: Long-term and short term sources of financing. Long term project financing are for projects that have long financing periods for example 10 years, 20 years or even 30 years payment periods. On the other hand, short-term project financing are useful sources of financing due for repayments in less than 1 year. Examples of short-term project financing include overdrafts. In short term project financing, interest is only charged when a facility is used. The interest used and interest payments are also deductible. They can also be arranged on short-notice and are extremely flexible in the amount borrowed at any time.
Loans.
Loans have higher interest rates generally and are less flexible due to the duration of time needed. Loans have a pre-agreed amount and a pre-agreed time. Loans are also paid in stages or at the end of the loan repayment period.
Advantages of loans
- Simple processes of application
- Have lower interest rates.
- It allows operational cashflows to be used elsewhere in the business
- There is fast approvals in the preserves of shareholders.
- Flexible repayment plans
- Tax and accounting advantages
- Ther is credit score boost if the loan received is paid on time and without any hitches.
Disadvantages
- The main disadvantage is the collateral or security that must be given in place of a loan.
- Potential fees needed for application
- Short-term credit damage.
For the World Gambling Inc loan repayment period, the loan has a 10 –year duration
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 |
| Initial Capital | ||||||||||
| 1,000,000 | 20% | 20% | 20% | 20% | 20% | 20% | 20% | |||
| Loss/ profit | (200,000) | (200,000) | 100,000 | 120,000 | 144,000 | 172,800 | 207,360 | 248832 | 298598 | 358318 |
| 20,000 | 24,000 | 28,800 | 34, 560 | 41,472 | 49,766 | 59720 |
PV of laon
PV) = C * [(1 – (1 + i)^ – n) / i].
Where c= cash flow
- Is the interest rates
Nn= number of years.
PV= 1,000,000(1-(1+8%).>-10
=
SAVANT
Strategy
Using the SAVANT method of value addition of strategy; anticipation; Value addition; Negotiating and Transforming, the management of the Gambling complex will use the best possible strategy in trying to finance the 10 extra gambling venues in the city.
The acquisition will be financed by an 8% debt after the tax deductible interest expense so the cost of capital would be
Ke(Cost of Capital) = 8% * ( 1-34%) * 1 Million * 10 Gambling cites
= $ 528,000
Value -Added
After tax cost of operating profit for the acquisition is 1, 000,000 per year.
Value Added is (1,000,000- 528,000) = $ 472,000
This is also a net increase in the final earnings of the accounting period and the annual cash flow.
Transaction Cost Involved
The transaction costs involved in this process include; and this are definitely assumptions
$ 400,000 in transaction fees on legal, loan fee costs and accounting costs. Half of the costs of transaction are tax deductible so therefore the after –tax cost is
400,000-(34% *1/2*400,000) = $ 332,000
This is an additional $ 60,000 in excess of the first year value added. However, since the company debt is 10 years, there is still a positive NPVOF -60,000 in the first year. Interest on loan is also tax deductible and it should be noted that the return on loan can exceed interest payments. The cost of borrowing can be compared with the return of the project by doing the calculation on the Internal Rate of Return (Jacob, 2018|).
Other sources of long-term project financing include Sale and leaseback of Assets. This is where a company sells its assets to a financial institution and then leased back to the company on a certain specified term. This releases are capital assets which are used for the investment of the long term project. The capital assets can be used for investment but they should be offset by the loss of capital and rental payment should the assets increase in value.
This is where some loans are secured by a floating or a fixed charge against a company’s assets which are otherwise known as debentures. Debenture holders receive their interest paid before any dividend is paid to ordinary shareholders. If the business fails, the holders will be categorized as preferential creditors and will also be paid first before any other thing is done. S corps can decide to finance the 10 additional locations by use of debentures (Nunns, et al,., 2016.)
They are private investors who invest directly in a company and receive an equity share and perhaps in many occasions a place in the board to make decisions as board members. They invest large sums of money in the region of $ 100, 000 and invest so in order to receive capital gains. Business angles are experienced investors and tend to invest in businesses that they have knowledge in or have prior engagement in that kind of business. For a Gambling arcade, prior investors in the gambling industry are the best business angels since they know how the return on capital is expected to be.
Venture capitalists
Venture capitalists are very common in the U.S. they offer more than $ 100,000 to businesses that financial institutions consider too risky to invest in. venture capitalists just like business angles exchange their capital in return of an equity share and a strategic position in decision making of the venture usually through non-executive positions of the board. The interest used and interest payments are also deductible. They can also be arranged on short-notice and are extremely flexible in the amount borrowed at any time. Their fundamental goal is to increase the value of the organization and then later sell it at a profit.
The rationale for the strategy in financing of an investment project depends on the selection of the financing methods and the determination of the financing sources and their structure. The financing method acts as an investment project and as a way to attract the investment resources in order to ensure that there is financial feasibility of the project. Many methods of project financing can be considered such as : self-financing, corporatization, credit financing, leasing, credit financing, budget financing, mixed financing and others
- Bond Financing
Bond Financing is a type of long term-borrowing that a company, a local government or even a state use to raise money that is primariry used fro long trem infrastructure. They obtain this money by issuing bonds to investors in exchange of a promise to repay the money with interest at schedules that are specified.
Advantages of Bond Financing
- Bonds are a debt security in which the issuer owes the bond holder a debt depending on the bond terms, the obliged interest payment or the coupon and or the principal amount at a later date or the maturity.
- They are viewed as safer investments than other investment options such as stocks.
- They suffer from less day-to-day volatility han other forms of investments like stocks.
- The coupon rate or the interest paid is most of the time higher than dividends paymenst.
- Bonds are often very liquid and its easy for an organization to sell a lot of bonds without affecting the price value of the bond.
- Bond holders have legal protection under most countries laws.
- There are different types of bonds to fit different types of investors.
Disadvantages of bonds
- Bondholders may lose all their money if a company that issued the bonds goes bankrupt.
- They are instruments of indebtness by the issuer to the holders.
- Fixed rate bonds are subject to interest rate risks meaning that prices affect the value of the prevailing interest.
- Bonds are subject to other risks like prepayment risks , reinvestment risks, liquidity risks, inflation risks, yield curve risks and credit risks.
- Some of the bond types are callable.
Bond value calculation
PVOA= PMT* (pvoa factor for n=10 )
Present value of annuity= 10%*1,000,000( 10%)
= 1000(7.722)
=$ 34, 792
Taxes on project financing
Tax on equity and debt
A discussion is held on tax on equity investments and loans as a source for gambling projects that are undertaken for 10 years. It will also focus on the the structures, the benefits and limitations and the drawbacks of the investments financing source.
Role Of Marked Taxes In Financing The Gambling Industry
(Radvan, 2017).
(Summers, 2017). The income from privatization also falls into the list of such incomes. This follows directly from the definition of privatization established by law, which represents the onerous alienation of publicly owned property in favor of legal entities and individuals (does not apply to land, natural resources, state and municipal housing funds, state reserves, foreign property) .
The distribution of privatization income between different levels of the budget system depends on the ownership of the property being privatized. Revenues from privatization of federal property are allocated to the federal budget, revenues from privatization of property of a constituent entity of the American Federal Government to the budget of a constituent entity of the American Federal Government, and proceeds from privatization of municipal property to the local budget. The administrator of such income is the authorized executive body for managing federal, regional or local property, respectively (Toossi, and Zhang, 2019.).
The size and types of privatization costs relate to budget expenditures and are not related to budget revenues, according to the principle of budget law, namely, the principle of universality, which means that certain revenues cannot be assigned to specific budget expenditures.Expenses for the implementation of state policy in the field of privatization and state property management are assigned to the target article of the classification of budget expenses of the same name. Accompanying income from privatization is income received in the form of interest, which is paid by the buyer of state or municipal property if an installment payment is provided to him .At the same time, the Civil Code of the American Federal Government, an exception was established in respect of income from the sale of shares and other forms of participation in capital, as well as state reserves of precious metals and precious stones. Such incomes are independent sources of covering the budget deficit (Weisbach, 2017).
The distribution of revenues from privatization between different levels of the budget system is carried out in accordance with budget legislation. Output. The main sources of financing state expenditures are its revenues from taxes, profits of state enterprises, seignior age and income from privatization. Moreover, their ratio should be balanced so that the amount provided by the budget corresponds to the total amount of budget revenues. Project financing may come in a variety of sources. However, the best and ultimate one depends on the ability of the financing option to produce the best results.
Conclusion and Advice
I would advice World Gaming Inc to go for the loan option. It has a smaller PV value compared to the 8% bond. The bond is where some loans are secured by a floating or a fixed charge against a company’s assets which are otherwise known as debentures. Debenture holders receive their interest paid before any dividend is paid to ordinary shareholders. If the business fails, the holders will be categorized as preferential creditors and will also be paid first before any other thing is done. S corps can decide to finance the 10 additional locations by use of debentures (Nunns, et al,., 2016.)
References
Huizinga, H., Voget, J. and Wagner, W., 2018. Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base. Journal of Financial Economics, 129(2), pp.306-328.
Humphreys, B., 2020. Legalized Sports Betting, VLT Gambling, and State Gambling Revenues: Evidence From West Virginia.
Jacob, M., 2018. Tax regimes and capital gains realizations. European Accounting Review, 27(1), pp.1-21.
Nunns, J., Burman, L., Rohaly, J. and Rosenberg, J., 2016. An Analysis of Donald Trump’s Revised Tax Plan. Urban-Brookings Tax Policy Center, Washington, DC, http://www. taxpolicycenter. org/sites/default/files/alfresco/publication-pdfs/2000924-an-analysis-ofdonald-trumps-revised-tax-plan. pdf.
Radvan, M., 2017. Municipalities and gambling taxation in the Czech Republic. Lex Localis, 15(3), pp.529-540.
Summers, L., 2017. Hassett’s flawed analysis of Trump tax plan.
Toossi, S. and Zhang, P., 2019. Video Gambling Adoption and Tax Revenues: Evidence from Illinois. Public Budgeting & Finance, 39(1), pp.67-88.
Weisbach, D.A., 2017. A Guide to the GOP Tax Plan-The Way to a Better Way. Colum. J. Tax L., 8, p.171.
