Royal Resort and Casino (RRC), a publicly traded company, caters to affluent customers seeking plush surroundings, high-quality food and entertainment, and all the "glitz" associated with the best resorts and casinos. RRC consists of three divisions: hotel, gaming, and entertainment. The hotel division manages the reservation system and lodging operations. Gaming consists of operations, security, and junkets. Junkets offer complimentary air fare and lodging and entertainment at RRC for customers known to wager large sums. The entertainment division consists of restaurants, lounges, catering, and shows. It books lounge shows and top-name entertainment in the theater. Although many of those people attending the shows and eating in the restaurants stay at RRC, customers staying at other hotels and casinos in the area also frequent RRC's shows, restaurants, and gaming operations. The following table disaggregates RRC's total EVA of $12 million into an EVA for each division:
Royal Resort and Casino
EVA by Division
(Millions$)
Entertainment Hotel Gaming Total
Adjusted accounting profits $ 5 $ 10 $30 $45
Invested Capital $40 $120 $60 $220
Weighted-average cost of capital 15% 15% 15% 15%
EVA $(1) $(8) $21 $12
Based on an analysis of similar companies, it is determined that each division has the same weighted-average cost of capital of 15 percent.
Across town from RRC is a city block with three separate businesses: Big Horseshoe Slots & Casino, Nell's Lounge and Grill, and Sunnyside Motel. These businesses serve a less affluent clientele.
Required:
a) Why does RRC operate as a single firms, whereas Big Horseshoe Slots, Nell's Lounge and Grill, and Sunnyside Motel operate as three separate firms?
b) Describe some of the interdependencies that are likely to exist across RRC's three divisions.
c) Describe some of the internal administrative devices, accounting-based measures, and/or organizational structures that senior managers at RRC can use to control the interdependencies that you describe in part (b).
d) Critically evaluate each of the "solutions" you proposed in part (c).