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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)
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% 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% 10.62% Calcuation of WACC: WACC = (D/V)*(1-t)*Rd+(E/V)*Re
Calc to Unlever Beta and Relever Beta Step 1. Unlever Beta Bu Step 2. Relever Beta using Target D/E Bl Now Calc Capm Capm
0.701
1.28
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
Take Average Bu and Relever it using Target Ratios Bl 1.24 Calc Capm Rf=30-year gov't rate Equity Premium Capm Calc Rd Premium 30-year rate Rd 18.13%
8.95% 7.43%
Target D/V (Restaurants): Target D/E (Restaurants): Take Average Bu and Relever using Target Ratios Bl 0.900817995 Calc Capm Rf=1-year gov't rate Equity Premium Capm Calc Rd Premium 1 year rate Rd 14.53%
6.90% 8.47%
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 Calc Rd Premium 1 year rate Rd 21.62%
6.90% 8.47%
Calculate WACC WACC 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
Tax Table
Marriott Taxes EBT Tax % 1978 35.4 83.5 42.4% 1979 43.8 105.6 41.5% 1980 40.6 103.5 39.2% 41.6% 44.8% 1981 45.2 121.3 37.3% 1982 50.2 133.7 37.5% 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%
**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%