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%