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Weighted Average Cost of Capital (WACC) for Restaurant Division

Cost of Debt :

‘Table A’ showed the financing structure of the Marriott Corporation’s restaurant division. Using the
data from ‘Table A’ & ‘Table B’ , the cost of debt is calculated as follows:

Debt Type Weight Rate Weighted Rate


Fixed 75% 8.72% 6.54%
Floating 25% 6.90% 1.73%
Total 8.27%
Premium 1.80%
Cost of Debt 10.07%

Cost of Equity :

Similar to the calculation of unlevered Beta done for the lodging division, here for restaurant
division the calculation has been performed. The equation is

𝐸𝑞𝑢𝑖𝑡𝑦 𝐵𝑒𝑡𝑎
βU = 𝐷
1+[(1−𝑡)∗ ]
𝐸

Equity Beta D/D+V E/D+V D/E Unlevered


Beta
Restaurant
Church's 0.75 4% 96% 0.04 0.73
Collins 0.60 10% 90% 0.11 0.56
Frisch's 0.13 6% 94% 0.06 0.13
Luby's 0.64 1% 99% 0.01 0.64
McDonald's 1.00 23% 77% 0.30 0.86
Wendy's 1.08 21% 79% 0.27 0.94
Average βU 0.64

Target D/D+E Target D/E = 42% / 58% t


42% 0.72 0. 44
𝐷
So, Levered Beta, βL = βu[1 + (1 − 𝑡) ∗ 𝐸 ] = 0. 90 ;

The Risk free rate = 3. 54% ; because it’s the average rate for US Govt. treasury bills returns (short Term)

Risk Premium = 8. 47%


Cost of Equity = Risk Free Rate (Rf) + βL (Risk Premium) = 3. 54% + 0. 90 * 8. 47% = 11. 19%

The calculation is tabulated as follows :

Risk Risk Premium ( The spread between Beta Expected Return or


free rate short term & treasure bill returns) Cost of Equity
(Rf)
Restaurant 3.54% 8.47% 0.90 11.19%

The formula for WACC :

WACC=(1 - t)rD(D/V) + rE(E/V) ; where, V= D+E

The required data are listed in the following table and using the above formula, we calculated WACC for
restaurant division.

Target t E/V Cost of Cost of WACC


D/V Equity Debt
(rE) (rD)
Restaurant 42% 0. 44 58% 11.19% 10.07% 8.85%

The WACC for restaurant division is 8. 85% .


Weighted Average Cost of Capital (WACC) for Contract Services Division :

In this case, no information of other companies for contract services is given. The WACC has
been calculated in a different way.

Cost of Debt:

The cost of debt is calculated following the same procedure and information previously done.
Debt Type Weight Rate Weighted Rate
Fixed 60% 8.72% 5.23%
Floating 40% 6.90% 2.76%
Total 7.99%
Premium 1.40%
Cost of Debt 9.39%

The unlevered Beta for Contract Services has been calculated from solving the following equation :

Mariott Beta = (Lodging Asset* Lodging Beta)+ (Contract Services Asset* Contract Services Beta) +
(Restaurant Asset*Restaurant Beta)

The unlevered Beta for Contract Services Division is 0. 63.


Contract Services
Assets Assets % Unlevered Betas
Lodging 2777.4 0.61 0.48
Restaurants 567.6 0.12 0.64
Contract 1237.7 0.27 0.63
Services
Marriott 4582.7 1.00 0.54

The levered Beta is calculated as follows :

Target D/(D+E) = 40%  E/(D+E) = 60%  D/E = 40% / 60% = . 67


Tax rate, t =0 . 44
𝐷
Levered Beta, βL = βu[1 + (1 − 𝑡) ∗ 𝐸 ] = 0. 86

Target D/D+E Target D/E Levered Beta


40% 0.67 0.86
Cost of Equity :
The Risk free rate = 3. 54% ; because it’s the average rate for US Govt. treasury bills returns (short Term)

Risk Premium = 8. 47%


Cost of Equity = Risk Free Rate (Rf) + βL (Risk Premium) = 3. 54% + 0. 86 * 8. 47% = 10. 86%

Risk Free Rate Risk Beta Expected Return or Cost of Equity


(Rf) Premium
Contract Services 3.54% 8.47% 0.86 10.86%

The formula for WACC :

WACC=(1 - t)rD(D/V) + rE(E/V) ; V = D+E

The required data are listed in the following table and using the above formula, we calculated WACC for
contract service division.
Target D/V t E/V Cost of Equity Cost of Debt (rD) WACC
(rE)
Contract 40% 0. 44 60% 10.86% 9.39% 8.62%
Services

The WACC for contract service division is 8. 62% .

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