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Appendix WACC - Marriott 2. Estimate the cost of capital (rwacc) for Marriott as a whole.

Givens: Company as a whole Target Debt Ratio (D/V) Target Debt to Equity Ratio (D/E) Debt Rate Prem above Gov't Tax Rate (t) (See Tax Rate Calculation)

60% 1.5 1.30% 44.8%

US Gov't Interest Rates Maturity Rate 30-year 8.95% 10-year 8.72% 1-year 6.90%

Calculation of Cost of Debt (Rd): Since Lodging using the long-term debt and restuarants and contract services use the shortterm debt, I am going to use the 10-year gov't interest rate to calculate the cost of debt (Rd). Rd = Debt rate prem above Gov't + 10-year gov't interest rate Rd 10.02%

Calcuation of WACC: WACC = (D/V)*(1-t)*Rd+(E/V)*Re

Calculation of Cost of Equity (Re): WACC Marriott uses the Capm model to calculate cost of equity. Capm = Rf + B(expected levered)*(equity premium) Rf = 10-year gov't interest rate B(levered) Equity Premium** Actual D/V (given in case) Actual D/E

8.72% 0.97 7.43% 41.00% 69.49%

Calc to Unlever Beta and Relever Beta Step 1. Unlever Beta Bu

0.701

Step 2. Relever Beta using Target D/E Bl

1.28

Now Calc Capm Capm

18.24%

**From the case - The arithmetic average from 1926-1987 of the spread between S&P 500 Composite Returns and Long-Term US Government Bond Returns 3. Estimate the asset bta for Marriott as a whole. Bu = asset beta Asset Beta

0.701

10.62%

Marriott - Lodging WACC Table 4. Estimate the cost of capital for the lodging division using a bottom up approach. Use Comparable Data Equity Beta Actual D/V Assumed Tax Rate Actual D/E Unlevered Beta 0.88 14% 44.8% 16.3% 0.807388303 1.46 79% 44.8% 376.2% 0.474292102 0.38 69% 44.8% 222.6% 0.170430244 0.95 65% 44.8% 185.7% 0.468908346 Average Bu 0.480254749

Hilton Hotels Holiday Corp La Quinta Motor Inns Ramada Inns

Target D/V (Lodging) Target D/E (Lodging)

74% 285%

Take Average Bu and Relever it using Target Ratios Bl 1.24 Calc Capm Rf=30-year gov't rate Equity Premium Capm

8.95% 7.43% 18.13%

Calc Rd Premium 30-year rate Rd

1.10% 8.95% 10.05%

Calculate WACC WACC

8.82%

Marriott - Restaurants WACC Table 4. Estimate the cost of capital for the restaurant division using a bottom up approach. Use Comparable Data Equity Beta Actual D/V Assumed Tax Rate Actual D/E Unlevered Beta 0.75 4% 44.8% 4.2% 0.7331 0.6 10% 44.8% 11.1% 0.5653 0.13 6% 44.8% 6.4% 0.1256 0.64 1% 44.8% 1.0% 0.6364 1 23% 44.8% 29.9% 0.8584 1.08 21% 44.8% 26.6% 0.9417 Average Bu 0.6434

Church's Fried Chicken Collins Foods International Frisch's Restaurants Luby's Cafeterias McDonald's Wendy's International

Target D/V (Restaurants): Target D/E (Restaurants):

42% 72%

Take Average Bu and Relever using Target Ratios Bl 0.900817995 Calc Capm Rf=1-year gov't rate Equity Premium Capm

6.90% 8.47% 14.53%

Calc Rd Premium 1 year rate Rd

1.80% 6.90% 8.70%

Calculate WACC WACC

10.45%

Marriott - Contract WACC Table 5. What is the cost of capital for Marriott's contract services division? Target D/V (Contract) Target D/E (Contract) Be (Marriott) Tax Rate (t) Target D/V (Marriott) Target D/E (Marriott) Weight for Lodging (wl)** Weight for Restaurant (wr)** Weight for Contract (wc)**

40% 67% 0.97 44.8% 41.0% 69.5% 61% 15% 25%

Unlever Beta for Marriott as a whole Bu 0.700913989

Bu(Marriott) = wl*bul+wr*bur+wc*buc .70091 = 61%*.4803+15%*.6434+25%*Buc 25%*Buc = 0.316584928 Buc = 1.27050715 Relever Unlevered Beta for Contract and Find WACC Bl 1.738436625

Calc Capm Rf=1-year gov't rate Equity Premium Capm

6.90% 8.47% 21.62%

Calc Rd Premium 1 year rate Rd

1.40% 6.90% 8.30%

Calculate WACC WACC

Division Lodging Restaurant Contract Total

14.81%

$ $ $

Ratio of Idenfiable Assets (Past 3 Years) 1985 1986 1987 Average 2,108.90 $ 2,236.70 $ 2,777.40 $ 2,374.33 582.60 $ 562.30 $ 567.60 $ 570.83 624.40 $ 1,070.20 $ 1,237.70 $ 977.43 $ 3,922.60

Division Unlevered Beta Lodging (Bul) 0.4803 Restaurant (Bur) 0.6434 Contract (Buc) 1.2705

% of Average Total 61% 15% 25% 100%

Tax Table Marriott Taxes EBT Tax %

1978 35.4 83.5 42.4%

Tax Average from 1978 to 1987: Tax Average (Last 3 years):

1979 43.8 105.6 41.5%

1980 40.6 103.5 39.2%

1981 45.2 121.3 37.3%

1982 50.2 133.7 37.5%

41.6% 44.8%

**Last three years seems closer to what the future may hold for tax rates

Answers Table Question Answer 1 In the paper 2 10.62% 3 0.7009 4 (lodging) 8.82% 4 (restaurants) 10.45% 5 14.81%

1983 76.7 185.1 41.4%

1984 100.8 236.1 42.7%

1985 128.3 295.7 43.4%

1986 168.5 360.2 46.8%

1987 175.9 398.9 44.1%

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Givens: Company as a whole Target Debt Ratio (D/V) Target Debt to Equity Ratio (D/E) Debt Rate Prem above Gov't Tax Rate (t) (See Tax Rate Calculation)

60% 1.5 1.30% 44.8%

US Gov't Interest Rates Maturity Rate 30-year 8.95% 10-year 8.72% 1-year 6.90%

Calculation of Cost of Debt (Rd): Since Lodging using the long-term debt and restuarants and contract services use the shortterm debt, I am going to use the 10-year gov't interest rate to calculate the cost of debt (Rd). Rd = Debt rate prem above Gov't + 10-year gov't interest rate Rd 10.02%

Calcuation of WACC: WACC = (D/V)*(1-t)*Rd+(E/V)*Re

Calculation of Cost of Equity (Re): WACC Marriott uses the Capm model to calculate cost of equity. Capm = Rf + B(expected levered)*(equity premium) Rf = 10-year gov't interest rate B(levered) Equity Premium** Actual D/V (given in case) Actual D/E

8.72% 0.97 7.43% 41.00% 69.49%

Calc to Unlever Beta and Relever Beta Step 1. Unlever Beta Bu

0.701

Step 2. Relever Beta using Target D/E Bl

1.28

Now Calc Capm Capm

18.24%

**From the case - The arithmetic average from 1926-1987 of the spread between S&P 500 Composite Returns and Long-Term US Government Bond Returns 3. Estimate the asset bta for Marriott as a whole. Bu = asset beta Asset Beta

0.701

10.62%

Marriott - Lodging WACC Table 4. Estimate the cost of capital for the lodging division using a bottom up approach. Use Comparable Data Equity Beta Actual D/V Assumed Tax Rate Actual D/E Unlevered Beta 0.88 14% 44.8% 16.3% 0.807388303 1.46 79% 44.8% 376.2% 0.474292102 0.38 69% 44.8% 222.6% 0.170430244 0.95 65% 44.8% 185.7% 0.468908346 Average Bu 0.480254749

Hilton Hotels Holiday Corp La Quinta Motor Inns Ramada Inns

Target D/V (Lodging) Target D/E (Lodging)

74% 285%

Take Average Bu and Relever it using Target Ratios Bl 1.24 Calc Capm Rf=30-year gov't rate Equity Premium Capm

8.95% 7.43% 18.13%

Calc Rd Premium 30-year rate Rd

1.10% 8.95% 10.05%

Calculate WACC WACC

8.82%

Marriott - Restaurants WACC Table 4. Estimate the cost of capital for the restaurant division using a bottom up approach. Use Comparable Data Equity Beta Actual D/V Assumed Tax Rate Actual D/E Unlevered Beta 0.75 4% 44.8% 4.2% 0.7331 0.6 10% 44.8% 11.1% 0.5653 0.13 6% 44.8% 6.4% 0.1256 0.64 1% 44.8% 1.0% 0.6364 1 23% 44.8% 29.9% 0.8584 1.08 21% 44.8% 26.6% 0.9417 Average Bu 0.6434

Church's Fried Chicken Collins Foods International Frisch's Restaurants Luby's Cafeterias McDonald's Wendy's International

Target D/V (Restaurants): Target D/E (Restaurants):

42% 72%

Take Average Bu and Relever using Target Ratios Bl 0.900817995 Calc Capm Rf=1-year gov't rate Equity Premium Capm

6.90% 8.47% 14.53%

Calc Rd Premium 1 year rate Rd

1.80% 6.90% 8.70%

Calculate WACC WACC

10.45%

Marriott - Contract WACC Table 5. What is the cost of capital for Marriott's contract services division? Target D/V (Contract) Target D/E (Contract) Be (Marriott) Tax Rate (t) Target D/V (Marriott) Target D/E (Marriott) Weight for Lodging (wl)** Weight for Restaurant (wr)** Weight for Contract (wc)**

40% 67% 0.97 44.8% 41.0% 69.5% 61% 15% 25%

Unlever Beta for Marriott as a whole Bu 0.700913989

Bu(Marriott) = wl*bul+wr*bur+wc*buc .70091 = 61%*.4803+15%*.6434+25%*Buc 25%*Buc = 0.316584928 Buc = 1.27050715 Relever Unlevered Beta for Contract and Find WACC Bl 1.738436625

Calc Capm Rf=1-year gov't rate Equity Premium Capm

6.90% 8.47% 21.62%

Calc Rd Premium 1 year rate Rd

1.40% 6.90% 8.30%

Calculate WACC WACC

Division Lodging Restaurant Contract Total

14.81%

$ $ $

Ratio of Idenfiable Assets (Past 3 Years) 1985 1986 1987 Average 2,108.90 $ 2,236.70 $ 2,777.40 $ 2,374.33 582.60 $ 562.30 $ 567.60 $ 570.83 624.40 $ 1,070.20 $ 1,237.70 $ 977.43 $ 3,922.60

Division Unlevered Beta Lodging (Bul) 0.4803 Restaurant (Bur) 0.6434 Contract (Buc) 1.2705

% of Average Total 61% 15% 25% 100%

Tax Table Marriott Taxes EBT Tax %

1978 35.4 83.5 42.4%

Tax Average from 1978 to 1987: Tax Average (Last 3 years):

1979 43.8 105.6 41.5%

1980 40.6 103.5 39.2%

1981 45.2 121.3 37.3%

1982 50.2 133.7 37.5%

41.6% 44.8%

**Last three years seems closer to what the future may hold for tax rates

Answers Table Question Answer 1 In the paper 2 10.62% 3 0.7009 4 (lodging) 8.82% 4 (restaurants) 10.45% 5 14.81%

1983 76.7 185.1 41.4%

1984 100.8 236.1 42.7%

1985 128.3 295.7 43.4%

1986 168.5 360.2 46.8%

1987 175.9 398.9 44.1%

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