The opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed.
(Each question must be a minimum of 200 words)1. If you think .docxhoney725342
(Each question must be a minimum of 200 words)
1. If you think about the information resources (hardware, software, databases, etc.) needed to run a business, which information resources are most vulnerable from cyber-attack or data breeches? Why? Please elaborate on your answer.
2. Data Storytelling: What It Is, Why It Matters
Case 6 – Marriott Corporation Company 4
Started in 1927 as a simple beverage stand in Washington D.C., Marriott Corporation has grown into a leading company in the lodging and food service industry in the United States. With its three (major) business involvements, lodging/hotel development and operating, contract-based food service and restaurant operations, the Marriott Corporation has an extensive portfolio of assets, generating a whopping $223M profits of a $6.5B revenue in 1987. Weighted share for each branch expressed in appendix A.
Aligned with financial theory, spreading your investments across several industries is a tool for minimizing your unsystematic risk. However, this also raises some complications regarding the accuracy of its financial calculations. More specifically, if the corporation is able to make good decisions about investment options and risk management associated with said investments when it operates in such large variety of industries. Marriott is aware of the potential skewing in its projected numbers, and have taken certain steps to combat this. Most notably, when calculating the cost of capital and debt, they chose to view each division as an independent company, in additional to the mother company. However, Mr. Dan Cohrs, VC of project finance, has expressed some concerns regarding the company’s financial management, and its effect on the accuracy on the financial results,
Before addressing the problems stated above, it is important to understand them in the contexts of their financial strategy. Marriott Corporation lists 4 strategies related to financial management
· Manage rather than own hotel assets
· Invest in projects that increase shareholder value
· Optimize the use of debt in the capital structure
· Repurchase undervalued shares
The first one is a common partnership structure, designed to share risk with willing participants. Marriott conducts market research, develop plans and evaluates the financials, and when completed, sells the assets while retaining operating control. The last move separates them from usual real estate developers, and allows them to negotiate ownership over some of the cash flows (usually around 3% of revenue and 20% of profits).
The second one is not a controversial one, as firms task of increasing shareholder value is widely considered a pillar stone in the financial world[footnoteRef:1]. As investments comes with uncertainty, the accuracy of the hurdle rate used is crucial to whether projections will come true. Here lies a key component in the initial problem, as hurdle rates is based on a wide variance of factors. When operating in diffe ...
(Each question must be a minimum of 200 words)1. If you think .docxhoney725342
(Each question must be a minimum of 200 words)
1. If you think about the information resources (hardware, software, databases, etc.) needed to run a business, which information resources are most vulnerable from cyber-attack or data breeches? Why? Please elaborate on your answer.
2. Data Storytelling: What It Is, Why It Matters
Case 6 – Marriott Corporation Company 4
Started in 1927 as a simple beverage stand in Washington D.C., Marriott Corporation has grown into a leading company in the lodging and food service industry in the United States. With its three (major) business involvements, lodging/hotel development and operating, contract-based food service and restaurant operations, the Marriott Corporation has an extensive portfolio of assets, generating a whopping $223M profits of a $6.5B revenue in 1987. Weighted share for each branch expressed in appendix A.
Aligned with financial theory, spreading your investments across several industries is a tool for minimizing your unsystematic risk. However, this also raises some complications regarding the accuracy of its financial calculations. More specifically, if the corporation is able to make good decisions about investment options and risk management associated with said investments when it operates in such large variety of industries. Marriott is aware of the potential skewing in its projected numbers, and have taken certain steps to combat this. Most notably, when calculating the cost of capital and debt, they chose to view each division as an independent company, in additional to the mother company. However, Mr. Dan Cohrs, VC of project finance, has expressed some concerns regarding the company’s financial management, and its effect on the accuracy on the financial results,
Before addressing the problems stated above, it is important to understand them in the contexts of their financial strategy. Marriott Corporation lists 4 strategies related to financial management
· Manage rather than own hotel assets
· Invest in projects that increase shareholder value
· Optimize the use of debt in the capital structure
· Repurchase undervalued shares
The first one is a common partnership structure, designed to share risk with willing participants. Marriott conducts market research, develop plans and evaluates the financials, and when completed, sells the assets while retaining operating control. The last move separates them from usual real estate developers, and allows them to negotiate ownership over some of the cash flows (usually around 3% of revenue and 20% of profits).
The second one is not a controversial one, as firms task of increasing shareholder value is widely considered a pillar stone in the financial world[footnoteRef:1]. As investments comes with uncertainty, the accuracy of the hurdle rate used is crucial to whether projections will come true. Here lies a key component in the initial problem, as hurdle rates is based on a wide variance of factors. When operating in diffe ...
Coursework ProjectCompanies are paying out too much in dividenCruzIbarra161
Coursework Project
“Companies are paying out too much in dividends. Shareholders have too much power in corporate affairs. In addition, company law should be changed to allow more power for other “stakeholders” – customers and employees. So says Andy Haldane, chief economist at the Bank of England, in a critique that will be seized upon as compelling evidence of broken capitalism.” Bill Jamieson
The assertion within the above quote is that companies are not investing for the future as much as they should. Thus, pursuing short-termism – a focus on immediate gains rather than long-term prospects. Given this assertion, you are required to:
a) Evaluate dividend policy theories and whether companies should maximise shareholders wealth or satisfice stakeholders’ other objectives.
(25 marks)
b) Select a company of your choice from the top 250 UK listed companies for which you can easily access annual reports, especially information on dividend policy, share prices, and capital structure for a continuous period of not less than 11 years. Using this information, critically evaluate whether the firm’s dividend policy have had any impact on its share price.
(35 marks)
c) Using Fisher-Hirshleifer model, examine firms’ investment decisions, owners’ consumption decisions in relation to the role of capital markets. (20 marks)
d) Discuss the importance of merger and acquisition for developed economy (20 marks
Total marks (100 marks)
Your coursework should not exceed 3000 words. There is no fixed penalty for exceeding the word count, but students should be made aware that the marker will not consider any work after the +10% word count tolerance has been reached, within the allocation of marks. Students may therefore be penalised for a failure to be concise and for failing to conclude their work within the word count specified.
Indicative contents
a)
· Critically review / evaluate dividend policies
· What is the impact of dividend payment on companies’ investment practices and their capital structure?
· Who are stakeholders within a company and what are competing interests of stakeholders versus shareholders?
(35 marks)
b)
· Role of dividend in terms of signalling theory
· Use data to benchmark comparison between share price and firm’s dividend policy
· To carry out data analysis and comment what other factors than dividend pay-out impact on company’s share price
(35 marks)
c)
· Use HL model to explain the operation of the separation theorem.
· Infer the relationship between capital markets and consumption decision
· Relate the HL model with agency relationship
(30 marks)
d)
· Define merger and acquisition
· Discuss importance of merger
· Why merger and acquisitions are more active in developed countries
READING ASSIGNMENT
Your project must be submitted as a Word document (.docx, .doc)*. Your project will be individua ...
The article focuses on the Return on Equity (ROE)as the benchmark .docxmattinsonjanel
The article focuses on the Return on Equity (ROE)as the benchmark for assessing a business’s financial health.
Do you agree with this approach? (Support your response with 2 - 4 examples of financially healthy companies.).
Additionally, this article presents a spreadsheet analysis for commission-based businesses. What approach would you implement for a manufacturer?
How would it differ for a service organization, such as a CPA firm, staffing firm, or consulting firm?
ommission-based organizations’
values are affected by factors that
are not typical of manufacturing or
other retail business entities. One such
example is an insurance agency, which
exemplifies three factors germane to a
commission-based business. First, an
agency acts as an intermediary by pro-
viding the service of arranging insur-
ance coverage between an insurer and
an insured party. Thus, one of the
agency’s most valuable assets is its
client list. Second, the agency has the
fiduciary responsibility of either collect-
ing or arranging for the payment of pre-
miums by the insured to the insurer.
Third, an agency business typically is
not capital intensive, and owners gener-
ally take most of the profits of the
agency as bonuses or salary.
Our purpose in this article is to show
how a simple spreadsheet model can be
used to demonstrate the impact of dif-
ferent operating and capital manage-
ment strategies on the financial perfor-
mance of a commission-based business
such as an insurance agency. The model
is easy to develop and understand and is
flexible enough to allow for numerous
strategies. Instructors can use the model
to isolate the impact of a single strategy
or measure the impact of a combination
of strategies on performance.
The objective of the manager of a fee-
based business is to coordinate the
resources available in such a way as to
maximize financial performance. Man-
agement must determine growth, operat-
ing expenses, investment opportunities,
cash management opportunities, and the
level of profit retention. All of these fac-
tors affect financial performance and will
be considered in the model.
A typical business has various mea-
sures of financial performance that are
used in evaluating its health. Although
various measures have been developed
for evaluation of the productivity and
profitability of a commission-based
business, in this article we focus on the
rate of return on equity (ROE). Owners
and managers affect the numerator of
ROE by controlling growth, operating
expenses, investment opportunities, and
cash management opportunities. Own-
ers and managers affect the denomina-
tor of ROE by determining the profit
retention rate and, thus, the equity posi-
tion of the business. Successful business
owners should strive to maximize ROE,
which serves as a proxy for maximizing
the value of a business.
The Model
The model is a spreadsheet model that
can be used for any commission-based
business, such as an insurance agency,
travel agency, fo ...
Mercer Capital's Value Focus: FinTech Industry | Third Quarter 2021 Mercer Capital
Mercer Capital’s quarterly newsletter, FinTech Watch, provides an overview of the FinTech industry, including public market performance, valuation multiples for public FinTech companies, and articles of interest from around the web. This newsletter focuses on FinTech segments, including payment processors, technology, and solutions companies, examining general economic and industry trends as well as a summary of M&A and venture capital activity.
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This is because market conditions have become more stabilized as time has passed, so it is useful to exclude data from more volatile time periods. Specifically, we wish to exclude the effects of the Great Depression.
1. Can you use Ameritrades information to estimate the WACC WhTatianaMajor22
1. Can you use Ameritrade's information to estimate the WACC? Why or why not?
2. How you found the comparable firm? Be specific with the process and variables used to identify the comparable firm. If you used capital structure in any of the steps, did you use market value or book value and why? Did you use the financial statement information of a particular year or the average of a sample period?
3. Why did you use equity and dividends received (rather than the original price and dividends provided) to calculate capital gains yield and dividend yield?
4. In the last 5 years, how is your company's total risk, systematic risk, and average return relative to the market average? How do you measure total risk and systematic risk?
5. Why is value-weighted average return used as the proxy for the market average?
6. In CAPM, what is the rf rate used and why did you choose that particular rate instead of the T-bill rate?
7. Why is annual market return used in the CAPM return estimate, rather than monthly return?
8. Are you able to use one of the dividend models to estimate the cost of capital? If yes, which dividend model is used and why?
9. Find annual dividend and growth rate of the annual dividends.
10. Find the D1, P0, and avg. dividend growth rate to get the cost of equity using the appropriate dividend model.
11. Next, use Market Model. State the model's equation, run the regression to get the outputs.
12. Should both intercept and beta be used in the cost of equity calculation? Why or why not? Be aware of the monthly to annual adjustment when estimating the cost of equity.
13. Is your CAPM beta similar to the beta from the market model?
14. Compare the three cost of equity estimates. Are they similar? If one of them is significantly different from the rest, it may not be reliable. Find reasons to justify why that particular model isn't reliable.
15. Of the two similar cost of equity estimates, what do you do from here?
16. To find the WACC, we also need to find the Rd and the capital structure weights. ***While the Rd of the comparable firm is given, use M&M proposition II to explain why we should use the Rd and capital structure weights of the comparable firm to calculate the WACC, rather than those of Ameritrade!
17. When it comes to estimating the capital structure weights, should you use book value or market value? Why?
Please use both the PowerPoint file and the Excel file for the case analysis and submit the Excel and Word files with your work back to me.
Video 1: https://youtu.be/S5YeCCW2Ues
After watching the first 5~ish minutes of this Video 1, you will need to construct "Sheet1" on your own as follows:
At the bottom of the Excel file, and on the right of "Exhibit 6", you should see a circle with a + sign within, click on it one time. A blank new sheet called 'Sheet1" should be created for you automatically. Note that the 5-yr sample period we need to use, as indicated in the video is Dec 31 of 1991 to Dec 31 o ...
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
2. Elemental Economics - Mineral demand.pdfNeal Brewster
After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
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Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
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Loan Application: Submit your application, including financial and personal information.
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USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
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Abhay Bhutada Leads Poonawalla Fincorp To Record Low NPA And Unprecedented Gr...Vighnesh Shashtri
Under the leadership of Abhay Bhutada, Poonawalla Fincorp has achieved record-low Non-Performing Assets (NPA) and witnessed unprecedented growth. Bhutada's strategic vision and effective management have significantly enhanced the company's financial health, showcasing a robust performance in the financial sector. This achievement underscores the company's resilience and ability to thrive in a competitive market, setting a new benchmark for operational excellence in the industry.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
Which Crypto to Buy Today for Short-Term in May-June 2024.pdf
Marriott case
1. 1
Case Cover Page
Title of Case: Marriott Corporation: Cost of Capital
Submission date: 5/10/2016
CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this report and that
any assistance I received in its preparation is fully acknowledged and disclosed in the
paper. I have also cited any sources from which I used data, ideas or words; either
quoted directly or paraphrased I also certify that this paper was prepared by me (my
team) specifically for this course.
Team member Last name, First name/ ID/ Sign
Team member 1 Bui, Thao / 009969505 /
Team member 2 Bakhtiari, Nima / 008487921 /
Team member 3 Catig, Justin / 008460569 /
Team member 4 Hiep, Sorony / 009754277 /
Team member 5 Vo, Huynh / 009535240 /
2. 2
Table of Contents
Executive Summary 3
What is the weighted average cost of capital for Marriott 6
Corporation?
What type of investments would you value using Marriott’s 8
WACC?
If Marriott used a single corporate hurdle rate for evaluating 9
investment opportunities in each of its lines of business,
what would happen to the company over time?
What is the cost of capital for the lodging and restaurant 10
divisions of Marriott?
What is the cost of capital for Marriott’s contract services 15
division? How can you estimate its equity costs without
publicly traded comparable companies?
3. 3
Dan Cohrs, Vice-President of Marriott Corporation's project finance prepares the
annual provisions for hurdle rates at each of the three key operations for the firm.
Founder Willard Marriott started Marriott Corp in the late 1920s with stand alone root
beer stand, expanding it over time into a biggest leader in providing lodging, contract
services and food service with sales of over $6 billion by the late 1980s. In 1987, sales
grew by 24% and return on equity remained at 22%. In addition, sales and earnings per
share has doubled over the past few years, Marriott’s operating strategy was to sustain
this direction. Marriott’s 1987 annual report stated:
“We intend to remain a premier growth company. This means aggressively developing
appropriate opportunities within our chosen lines of business—lodging, contract
services, and related businesses. In each of these areas, our goal is to be the preferred
employer, the preferred provider, and the most profitable company.
According to Harvard Business School, Marriott had three main lines of
business: lodging, contract services and restaurants. Each line of business is calculated
as an independent company due to the different risk and business operations across
the three divisions. The first key operation lodging generating close to 51% of
company’s profits and 41% of company sales. Second key line of business contract
service generating close to 33% of company profit and 46% of company sales.Third key
operation of the company provided by restaurants adds 16% of company profits and
13% of sales.
The four key elements of Marriott’s financial strategy were managing hotel assets
as opposed to owning, goal of increasing shareholders’ value from investing in projects,
optimizing the use of debt in capital structures, and repurchasing undervalued shares.
4. 4
The first financial strategy was managing hotel assets as opposed to owning. Marriott
developed over $1 billion worth of hotel properties. After development, Marriott sold the
hotel assets to limited partners while retaining operating control. In 1987, Marriott and
Courtyard hotels were syndicated for $890 million, Marriott operated over $70 billion
worth of syndicated hotels. The second financial strategy was investing in projects that
increase shareholder value. Discounted cash flow methods were used to assess
potential investments. According to a Marriott Executive, ”Our projects are like a lot of
similar little boxes...managers still have discretion over unit-specific assumptions, but
they must conform to the corporate templates.” The third strategy was optimizing the
use of debt in capital structure. Marriott used an interest coverage target instead of a
target debt-to-equity ratio, 59% of total capital. The final strategy was repurchasing
undervalued shares. Marriott was focused on repurchasing stocks that fell under their
“warranted equity value.” The company repurchased 13.6 million shares of common
stock for $429 million.
Marriott Corporation relied on measuring the opportunity cost of capital for
investments by utilizing the concept of Weighted Average Cost of Capital (WACC). In
April 1988, VP of project finance, Dan Cohrs suggested that the divisional hurdle rates
at the company would have a key impact on their future financial and operating
strategies. Marriott intended to continue its growth at a fast pace by relying on the best
opportunities arising from their lodging, contract services and restaurants lines of
businesses. To make the company managers more involved in its financial strategies,
Marriott also considered using the hurdle rates for determining the incentive
compensations.
5. 5
1. What is the weighted average cost of capital for Marriott Corporation?
Marriott uses the Weighted Average Cost of Capital (WACC) as a metric for cost of
capital. The formula for calculation below:
WACC = (1 - T) * rd(D/V) + re * (E/V)
Where:
T Corporate tax
rd Cost of debt
D Market value of debt
V Firm’s Enterprise Value (Market Value of Debt + Market Value of Equity)
re Cost of equity
E Market value of equity
Calculations for Marriott Corporation:
Value: Source:
T 34.00% Provided
rd 10.25% *See Calculations on p. 7
D 60% Given target debt ratio
V 100% 40.00%+60.00%=100%
re 20.72% *See Calculations on p. 16
E 40% 100%-60%=40%
WACC = (1-.34)(.1025)(.60) + (.2072)(.40) = .12347 ≈ 12.35%
a) What risk-free rate and risk premium did you use to calculate the cost
of equity?
Calculating Cost of Equity:
Marriott Corp utilizes the Capital Asset Pricing Model (CAPM) to derive their cost of
equity:
re = Rf + Beta (Rm - Rf)
Market risk-premium is calculated by rm - rf. The spread between S&P 500 Composite
Returns and Long-Term U.S. Government bond returns for the year 1926-87 is 7.43%,
given by Exhibit 5.
Rf is constituted by the government bond rate of 8.95%. Using the highest and longest
as the risk free interest rate provided by the U.S government in April 1988, given by
Table B.
Value Source
6. 6
Equity Beta = 1.1 See Exhibit 3
Asset Beta = .667 D/E = .4/.6
βL = βu (1 + (1 – τ) (D/E))
= 1.1 (1 + (1 – .34) (.4/.6))
= 1.584
re = 8.95% + 1.584 (7.43%) = 20.72%
b) How did you measure Marriott’s cost of debt?
Calculating Cost of Debt:
Marriott risk free-rate is the government bond rate of 8.95%, obtained from Table B.
Marriott’s Debt Rate Premium is found as the credit spread on Table A, 1.30%.
Book definition: Cost of debt = Risk free rate +Spread
Thus,
Rd = government bond rate + credit spread= 8.95% + 1.30% = 10.25%
*Spread is based on riskiness of company
2. What type of investments would you value using Marriott’s WACC?
Since the WACC is 12.35%, any investments with a WACC equal or lower than
12.35% would be an investment to be considered of value by Marriott. The company will
continue to look at other investments that will lower their WACC. The type of investment
to be considered is issuing bonds to get the financing more cheaply. The firm is built
upon lodging, contract services and restaurants as the three key operations. By
continuing investments in their three key operations has created different WACC for
each operation versus the whole company.
Marriott can seek projects that will increase shareholders’ value by expanding its
investment interests. In 1976, Marriott attempted this by opening two theme parks. Long
term investments opportunities places Marriott in a predicament when attempting to
optimize their debt.
7. 7
3. If Marriott used a single corporate hurdle rate for evaluating investment opportunities
in each of its lines of business, what would happen to the company over time?
Investopedia online defines a hurdle rate as the minimum rate of return on a project or
investment required by a manager or investor. In order to compensate for risk, the
riskier the project, the higher the hurdle rate. The main use of the hurdle rates is to
assess investment decision in order to determine if it’s reasonable. Using different rates
for different divisions can be advantageous as different projects amongst different
divisions might have different risk and reward. Companies should be careful when
applying a single cost of capital across various departments.
The numbers below were calculated for Marriott and its different divisions.
WACC for Marriott= 12.35%
WACC for lodging division = 10.37%
WACC for restaurant division =14.53%
WACC for Marriott’s contract division = 14.31%
Looking at the above WACC’s we can see that each division is different. The cost of
capital for lodging is lowest. It is even lower than the WACC for the entire company. The
cost of capital is often equated risk, therefore the risk in the lodging department is lower
when compared with other departments that have a higher WACC.
If Marriott was to use a single corporate hurdle rate then they would be using the
12.35% rate which is the WACC for the entire company. By breaking down WACC’s to
each respective division it will prevent Marriott from using this rate for every project.
This is beneficial or any project that arises out of the lodging division will be rejected
since its cost of capital of 9.25% is lower than the cost of capital for the company. Using
a higher rate will result in a negative NPV as well as a reduced cash flow.
What would happen is eventually projects from the restaurant and contract service
division will be approved since they are evaluated at a lower rate than the determined
cost of these various divisions. Over time, Marriott will be approving more high risk
project from the restaurant and contract service division by evaluating them at a lower
rate, while they will be rejecting lower risk projects from the lodging division because
they are using a higher rate. As this type of decision making continues Marriott will be
assuming higher risk as it to approve riskier projects.
4. What is the cost of capital for the lodging and restaurant divisions of Marriott?
Lodging Division Cost of Capital
WACC = (1 - T) * rd(D/V) + re * (E/V)
T = 34%
8. 8
rd = 10.05%, See part a
D/V = 74%, Market-Value Target-Leverage Ratios and Credit Spreads for
Marriott and Its Divisions in Table A page 4
E/V = 26%, 100%-D/V= 74%
re = rf + Beta (RP)
rf = 8.95% See part a
RP = 7.43%, See part a
Beta = 1.623, See part c
re = .0895 + 1.623(.0743), re = .2101
WACC = (1-.34)*.1005(.74) + .2101*(.26)
WACC of Lodging Division = .1037, 10.37%
Restaurant Division Cost of Capital
WACC = (1 - T) * rd(D/V) + re * (E/V)
T = 34%
rd = 8.70%, See part a
D/V= 42%, Market-Value Target-Leverage Ratios and Credit Spreads for E/V=
Marriott and Its Divisions in Table A page 4
58%, 100%-D/V= 58%
re = rf + Beta (RP)
rf = 6.90% See part a
RP= 8.47%, See part a
Beta= 1.653, See part c
re = .0690 + 1.653(.0847), re = .2090
WACC = (1-.34)*(.0870)(.42) + .2090*(.58)
WACC of Restaurant Division = .1453, 14.53%
a. What risk-free rate and risk premium did you use in calculating the cost of equity for
each division? Why did you choose these numbers?
The risk-free rate used for Marriott’s lodging division is 8.95%, which used a long-term
30 year risk-free rate. Marriott’s restaurant division has a 6.90% risk-free rate, which
used a short-term 1 year risk-free rate. The values for the risk-free rates are given in
Table B on page 4. The risk premium for the lodging division is 7.43%. The risk
premium for the restaurant division is 8.47%. We used the spread between using 1926-
1987 periods as the market risk premium in Exhibit 5 page 10. Since the lodging
division is long term, we used the spread between S&P 500 Composite returns and
long-term U.S. government bond returns. Since the restaurant division is short term, we
9. 9
used the spread between S&P 500 Composite returns and short-term U.S. Treasury bill
returns.
b. How did you measure the cost of debt for each division? Should the debt cost differ
across divisions? Why?
To measure the cost of debt for each division we used, cost of debt rd = rf + spread. The
risk-free rates for the lodging and restaurant divisions are 8.95% and 6.90%
respectively. The risk-free rate is given in Table B page 4 based on the maturity of U.S
Government interest rates, 30-year and 1-year. The spread is the debt rate premium
above government in Table A page 4. The spread for the lodging and restaurant
divisions are 1.10% and 1.80% respectively. The pre-tax cost of debt for the lodging
division is 10.05%, 8.95%(risk-free) + 1.10(debt rate premium above government). The
pre-tax cost of debt for the restaurant division is 8.70%, 6.90%(risk-free) + 1.80%(debt
rate premium above government). The tax rate used is 34%, the highest corporate tax
between 1986-1992. The after-tax cost of debt is (1-t) x rd. The after-tax cost of debt for
the lodging division is 6.63%, (1-.34) x 10.05%. The after-tax cost of debt for the
restaurant division is 5.74%, (1-.34) x 8.70%.
The cost of debt should be different across each division because each division is
treated as an independent company. The maturity of U.S interest rates are different for
the two divisions because the lodging division uses long-term 30-year and the
restaurant division uses short-term 1-year. The spread between the debt rate and the
government bond rate varied by division because of differences in risk
c. How did you measure the beta of each division?
To measure the beta of each division you need to collect the raw equity(levered) beta
and D/E of other firms in the same industry. The equity(levered) beta and market
leverage of comparable firms is found on Exhibit 3 page 8. To the unlevered beta use
the following formula for each firm: Bu= BL / (1+ (D/E) * (1-T)). To find the D/E, divide
market leverage by 1 minus market leverage, D/E = market leverage / (1-market
leverage). Once you have the D/E you can plug it into the unlevered beta formula. Once
you obtain the unlevered beta for each comparable firm, get the average. Next, re-lever
beta by plugging the unlevered average beta into the following formula:
BL = Bu(1+(D/E) * (1-T)). To find the D/E use the debt percentage in capital for the
division found in Table A page 4. To get D/E from debt percentage in capital use the
following formula: D/E= debt % / (1- debt %). Now the unlevered(asset) beta can be re-
levered(equity) beta using: BL = Bu(1+(D/E) * (1-T)). Note the tax rate is 0 since there is
no information of tax rates for other firms.
10. 10
Beta for Lodging Division
Step 1) Gather raw equity beta of other firms
Hilton
Hotels
Corporation
Hilton Hotels
Corporation
La Quinta
Motor Inns
Ramada
Inns, Inc.
Levered(equity)
beta
.76 1.35 .89 1.36
Market leverage 14% 79% 69% 65%
Step 2) Unlever the betas and convert Market leverage to D/E.
Tax = 0
Hilton Hotels
Corporation
Hilton Hotels
Corporation
La Quinta
Motor Inns
Ramada Inns,
Inc.
D/E .14/(1-.14)
= .163
.79/(1-.79)
= 3.762
.69/(1-.69)
= 2.226
.65/(1-.65)
= 1.857
Unlevere
d beta
formula
.76/(1+.163(
1-t))
= .653
1.35/(1+3.762
)
= .283
.89/(1+2.226)
= .276
1.36/(1+1.857)=
.476
Step 3) Compute the average of the asset betas
Unlevered(asset) beta .653 .283 .276 .476
Average
unlevered(asset) beta
(.653+.283+.276+.476) /
4
= .422
Step 4) Re-lever the average asset beta
BL = Bu(1+ (D/E) * (1-t))
Debt % in capital for lodging division = 74%
D/E = debt % in capital / 1- debt % in capital = .74/(1-.74) = 2.846
BL = .422(1+2.846(1-0)) = .422(3.846) = 1.623
Re-levered(equity) beta of Marriott Lodging division = 1.623
Beta for Restaurant Division
11. 11
Step 1) Gather raw equity beta of other firms
Church’s
Fried
Chicken
Collins
Food Int.
Frisch’s
Rest.
Luby’s
Cafe.
McDonald’s Wendy’s
Int.
Levered
(equity)
beta
1.45 1.45 .57 .76 .94 1.32
Market
Leverage
4% 10% 6% 1% 23% 21%
Step 2) Unlever the betas and convert Market leverage to D/E.
tax = 0
Church’s
Fried
Chicken
Collins
Food Int.
Frisch’s
Rest.
Luby’s
Cafe.
McDonald’s Wendy’s
Int.
D/E .04/(1-.04)=
.042
.10/(1-
.10)= .111
.06/(1-
.06)= .064
.01/(1-
.01)= .010
.23/(1-.23)
= .299
.21/(1-.21)
= .266
Unlever
ed beta
formula
1.45/(1+.04
2(1-t))
= 1.392
1.45/(1+.1
11)
= 1.305
.57/(1+.06
4)
= .536
.76/(1+.01
0)
= .752
.94/(1+.299)
= .724
1.32/(1+.2
66)
= 1.043
Step 3) Compute the average of the asset betas
Unlevered
(asset) beta
1.392 1.305 .536 .752 .724 1.043
Average unlevered
(asset) beta
(1.392+1.305+.536+.752+.
724+1.043)/6
= .959
Step 4) Re-lever the average asset beta
BL = Bu(1+ (D/E) * (1-T))
Debt % in capital for Restaurant division = 42%
12. 12
D/E = debt % in capital / 1- debt % in capital, .42/(1-.42) = .724
BL = .959(1+.724(1-0))= .959(1.724) = 1.653
Re-levered(equity) beta of Marriott Restaurant division = 1.653
5. What is the cost of capital for Marriott’s contract services division? How can you
estimate its equity costs without publicly traded comparable companies?
To calculate the cost of capital for the contract services is more complex because
there aren’t any publicly traded peer companies to compare against and privately held
firms either do not report their results or do not report results compliant with the financial
reporting requirements of publicly traded companies.
Based on the projected mix of fixed and floating debt, the cost of debt for the
contract services division is estimated at 10.07%
To calculate the cost of capital for the contract services is more complex because there
aren’t any publicly traded peer companies to compare against. Privately held companies
do not report their results because they do not have to be compliant with the financial
reporting requirements of publicly traded companies.
What is the WACC for Marriott’s contract services division?
βu for Marriott is the weighted average of the Divisional βu’s:
Identifiable
Assets
Ratio Beta Unlevered
Lodging $2,777.4 0.61 0.422
Restaurants $567.60 0.12 0.959
Contract
Services
$1,237.70 0.27
Marriott $4,582.70 1 0.667
.61(.422) + .12(.959) + .27(βu) = .667
βu = 1.0907
Cost of Debt
rd = government bond rate + credit spread