Download - Marriot Case
Assignment -2Marriott Corporation – The Cost of
CapitalFaculty: Prof. Abhilash S Nair
Financial Management II
Submitted By:Arshdeep SinghAmit KumarAshish Dennis DeanVimal Mohan Jain
Calculating WACC for MarriotMarriot has three divisions :
LodgingRestaurantContract services
Financial Strategy of MarriottManage rather than own hotel assets Invest in projects that increase shareholder
value Optimize the use of debt in the capital
structure Repurchase undervalued sharesunlevered
Unlevered Asset BetaAsset beta = (E/V) * Equity beta
E = Market value of equityV = Market value of company = Market value of equity + Market value of Debt
WACC for Marriott CorporationLevered equity beta = 0.97Market leverage = 0.41Unlevered asset beta = (1-0.41)*0.97
= 0.57Target debt/value = 0.60Levered equity beta = 0.57/(1-0.60)
= 1.43
WACC for Marriott CorporationKeq = Rf + beta *Risk premium
= 8.95 + 1.43 * 7.43 = 19.57%Kdebt = 8.95 + 1.30 = 10.25%WACC = 0.4*19.57+0.6*10.25*(1-0.34)
= 11.89%
Asset Beta for Lodging
Leverage Eq. Beta Asset BetaHilton 0.14 0.88 0.76Holiday 0.79 1.46 0.31La Quinta 0.69 0.38 0.12Ramada 0.65 0.95 0.34
Average asset beta = 0.38
WACC for Lodging DivisionUnlevered asset beta = 0.38Target debt/value = 0.74Levered equity beta = 0.38/(1-0.74) = 1.46Keq = Rf + beta *Risk premium
= 8.95 + 1.46 * 7.43 = 19.80%Kdebt = 8.95 + 1.10 = 10.05%WACC = 0.26*19.80+0.74*10.05*(1-0.34)
= 10.06%
Asset Beta for Restaurant Division
Leverage Eq. Beta Asset BetaCFC 0.04 0.75 0.72CFI 0.10 0.60 0.54FR 0.06 0.13 0.12LC 0.01 0.64 0.63Mc 0.23 1.00 0.77WI 0.21 1.08 0.85
Average asset beta = 0.61
WACC for Restaurant DivisionUnlevered asset beta = 0.61Target debt/value = 0.42Levered equity beta = 0.61/(1-0.42) = 1.05Keq = Rf + beta *Risk premium
= 8.72 + 1.05 * 7.43 = 16.52%Kdebt = 8.72 + 1.80 = 10.52%WACC = 0.58*16.52+0.42*10.52*(1-0.34)
= 12.50%
Asset Beta for Contract Services DivisionThere is no publicly traded comparable
companies.We can consider the company as a
portfolio of three divisions.The asset beta of the whole company is
just a weighted average of the asset betas of the divisions.
Weights should be the fraction of total equity value in each division. The fraction of total identifiable assets can be taken as a proxy.
Asset Beta for Contract Services Division
CSA*)MV/CSV(R
A*)MV/RV(LA*)MV/LV(
MA
Asset Beta for Contract Services Division
So,0.57=909.7/1735.2*0.38+452.2/1735.2*
0.61+373.3/1735.2*Asset beta (CS)
Asset beta (CS) = 0.98
WACC for Contract Services DivisionUnlevered asset beta = 0.98Target debt/value = 0.40Levered equity beta = 0.98/(1-0.40) = 1.63Keq = Rf + beta *Risk premium
= 8.95 + 1.63 * 7.43 = 21.06%Kdebt = 8.95 + 1.40 = 10.35%WACC = 0.60*21.06+0.40*10.35*(1-0.34)
= 15.38%
WACCs of the Divisions
Lodging – 10.06% Restaurant – 12.50%Contract services – 15.38%
Marriott Corp. - 11.89%