Marriot Firm Cost of Capital Essay

1 ) What is the weighted normal cost of capital for Marriot Corporation? In short , outline the main element assumptions that you just made in computing the WACC. 2 . Precisely what is the cost of capital for the lodging and restaurant sections of Marriot Corporation? Briefly outline the important thing assumptions that you made in computer the cost of capital and outline any limitations that are presented by your analysis. several. If Marriot uses a single company-wide cost of capital to get evaluating investment opportunities in each of its occupation, what do you imagine will happen for the company after some time? 4. Quickly describe how each of the pursuing events will likely impact Marriot's cost of capital: (a) A rise in the long-term T-Bond charge by 2%. (b) Increased competition inside the restaurant business. (c) A gentle recession that causes companies to cut back on their general travel and business expense budgets.

Marriot Corporation: Cost of Capital

Question 1

The price of capital can be computed employing Weighted Common Cost of Capital (WACC) approach which is the weighted typical of cost of equity and cost of financial debt of the firm. The cost of personal debt is the current borrowing price at the time of the analysis (1988). Marriot calculates its Measured Average Expense of Capital (WACC). Using the subsequent equation: WACC = (1-corporate tax rate)(Pretax rate of cost of debt)(Market value of debt/ D+E))+ After duty rate of cost of equity(market value of equity/D+E)) Expense of Debt Floating rate debts is considered immediate debt, and so the 1 year govt interest rate is used to compute the cost of financial debt for all categories and Marriott as a whole. (6. 90%). Pertaining to fixed personal debt the long term level would be a better estimate. We're able to consider the returns in 30 12 months Government Provides in 04 1988, (8. 95%). Floating Debt (40%) - 6th, 9% Set Debt (60%) - eight, 95% Total debt sama dengan 40%*6, 9% + 60%*8, 95% sama dengan 8, 13% Premium previously mentioned Gov. costs – 1, 3% Rd = eight, 13% & 1, 3% = 9, 43% Expense of Equity The price of equity re, is calculated using the Capital Asset Costs Model (CPAM): re = rf + β (MRP) Where rf is the risk free rate all of us estimated earlier, β is the systematic risk and MRP is the industry risk high quality. β-Beta in 41% power is 1 ) 11 (Exhibit 3) and does not specifically addresses Marriot's target capital structure levered in 60% (Table A). Consequently , we would 1st need to un-lever this β-Beta and then button it back, using the following formula: t- Corporate tax charge 1987 sama dengan income taxes / income prior to income taxes = 175. 9/398. 9 = 44% β – Beta = 1 ) 472 D/E = 41/59 = 0, 695 (Exhibit 3) βL = βU [1+ (1-t) D/E] βU = 0, 8 β - Levered at 60 per cent

Marriot Company: Cost of Capital

Question 1/continued

βL sama dengan βU [1+ (1-t) 60/40] βL sama dengan 1, 472 MRP is definitely the expected excess return buyers demand. MRP = Elizabeth [Rm] – rf For the purpose of our evaluation we'll consider the distributed between S& P 500 composite returns and long term US govt bond earnings from 1926 to 1987 in display 5 = 7, 43%. Now, by using our quotes above we are able to calculate Marriott's Cost of Fairness as follows: lso are = rf + β (MRP) = 8, 72% + one particular, 472 5. 7, 43% = 19, 66% Rf=8, 72% (Table B) Finally, we can now estimate the entire WACC for Marriott Firm, based on the given personal debt and collateral amounts (Debt = 2499, Equity = (30 X 118. 8) = 3564) WACC = (1-t)Rd*D/V & Re*E/V = (1-44%)*9, 43%*2499/(2499+3564)+19, 66%*3564/(6063)= WACC=13, 73%

Marriot Corporation: Cost of Capital

Query 2

We're going use the same framework for calculating the weighted typical cost of capital for Marriott's lodging and restaurant divisions. Cost of Personal debt - Lodging and Cafe divisions Thinking about the same tax rate as estimated over, we search at Table A pertaining to the target amounts of debt to get both Accommodations and restaurant divisions (Lodging - 74%, restaurants -- 42%). Together with the target denominations in hand we all consider the proportions of floating and fixed rate bills in all the divisions respectively and determine the flying and fixed cost of debts to be able to infer the whole...

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