To do this we estimate that the floating debt rate is best estimated using the 1yr government rate in Table B — for the reason that we do not have any shorter term data or average, and this most closely would represent floating. However the inputs are changed to mirror the attributes and characteristics of the divisions.
If required we would have used the financial statement in appendix 1 to do so. Hence to find the unleveraged beta, we take the average of the equity? After having calculated the unleveraged?
After having calculated the three factors mentioned above we employ the following formula to find WACC: To reflect the shorter nature of the assets in the restaurant business division, we use short-term securities to estimate the risk free rate and the risk premium.
As the corporate tax rate is given we will not manually calculate it. Over time a single hurdle rate if consistently higher than the existing approach would significantly hurt the performance of company as the approach could lead Marriott to reject or accept investment opportunities which should have been accepted or rejected.
We now have all the data need to calculate the cost of equity: This is a reflection of the comments in the case about the longer durability of the asset and longer financing.
We realize the limitations of using comparable companies to estimate the? This would destroy shareholder value. Contract Division equals 1. For instance Lodging has a significant lower cost of capital WACC than the Restaurant and even than the company as a whole.
Marriott then calculate company wide cost of capital using weighted average of the individual divisions cost of capital.
Finally we find WACC by employing the formula: How to Write a Summary of an Article? While for the fixed debt portion we have selected the 10yr government rate. How does Marriott use its estimate of its cost of capital? Given this we have selected average returns of the long-term U. In otherwords, we could use WACC as our discount rate and hurdle rate to calculate NPV of potential investment projects of physical asset, where it is expected the financing will be similar to the financing of the company conducting the investment.
To determine the cost of capital, which also acted as hurdle rate for investment decision, cost of capital estimates were generated from each of the three business divisions; lodging, contract services and restaurants. As all data is given in Exhibit 3, we find unleveraged?
We will write a custom essay sample on Marriott Corporation: We do realize the data in Table A is the target-leverage ratio, but we are comfortable using the target capital structure for this purpose instead of the current capital structure.
To be consistent we opt for the long-term securities and long-dated data just as we did when calculation the cost of equity in question 3. These findings support the notion that incorporating debt will lower the cost of capital due to the tax shield. How can you estimate its equity cost without publicly traded comparable companies?
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? For the floating leg of the debt, we continue to use the 1 year government bond rate. For the purpose of the calculations we use the unleveraged?
In the following rD is calculated, while the tax shield is not included until the final WACC calculation. Using a single company-wide hurdle rate would create an uneven process in assessing investment opportunities across the divisions.
For the calculations of the fixed rate debt, we are using the 30 year government bond rate instead of the 10 year. Debt Capacity Cost of Debt Cost of Equity All of the above are calculated individually for each of the three divisions, and this is a critical aspect due to the varying cost of debt in particular for each division.
Given this we believe it is fair to use the S excess return over the risk free rate as the market risk premium MRP To find the?
We believe this approach enables Marriott to optimize the financial performance and in turn increase the shareholder value. Given the WACC calculations in the following questions, we see there is a significant difference in the cost of capital between the different divisions varying from 8.
To re-calculate in order for the?
If we were to then use one hurdle rate We chose to use 30 year rate for lodging since that probably lasts the longest, 10 year rate for restaurants since they probably last more than a year, and the 1 year rate for contract services which we assumed were the shortest lives.
2)What type of investments would you value using Marriott¶s WACC? To properly use WACC as a measure for the overall cost of capital, you need to consider the following issues. • You may use 34% as the corporate tax rate (after the Tax Reform Act). • CAPM. Market risk premium (rm −rf): Marriott Corporation, Hint Sheet Author: Simon Gervais Created Date.
Marriott Corporation- Corporate Finance presentation 1. Capital and the Comapny • Company measures opportunity cost of capital for investment with similar risk using the Weighted Average Cost of Capital.
• WACC= (1-t)*rD*D/V + rE*E/V Where, t= corporate tax rate rD= cost of debt D/V= % of debt financing rE= cost of equity E/V= % of. View Marriott-Corp-Case from FINANCE at Higher School of Economics.
RD, CL, JZ CASE 3 MARRIOTT CORPORATION COST OF CAPITAL Overall WACC risk free debt credit spread target. Marriott Corporation The Cost of Capital Author Student Number 董晖 林桐 吴正浩 祝承懿 Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Table of Contents Background The hurdle rate is the required return or.
Marriott Corporation: the Cost of Capital specifically for you. for only $/page. What is Marriott’s Weighted Average Cost of Capital? What types of investments would you value using Marriott’s WACC? Capital structure, 2) Cost of debt, 3) Cost of Equity.
As the corporate tax rate is given we will not manually calculate it. If.Download