The Cost Of Capital For Marriort.docx

1. Calculate marriort ‘s current unlevered beta using dollar values from the financial statement. Answer: Levered Equity beta 1.11 Value of long term debt $2,499 Value of Equity $3,564 Total $6,063 Debt to total value 41% Target debt ratio 60% Since we need the levered equity beta for 60% debt ratio, the equity levered beta for a debt. Ratio of 41% should be unlevered and levered back at 60% debt. Levered Equity Beta Actual Debt Ratio Unlevered Asset Beta Tax Rate

1.11 41% 0.76 34%

2. Marriot is projecting their future percentage of debt in their capital structure will increase to about 60%. When this happens to Marriot show what Marriot’s levered beta will be. Answer: when debt target is 60% then levered beta us 1.51 Unlevered asset beta Target debt ratio Levered equity beta

0.76 0.6 1.51

3. List the pure play Answer: these are following because in the lodging these segments are working. Hilton Hotels Holiday Corp. La Quinta Motor Inns. Ramada Inns. 4. What are the Unlevered betas of each Pure Play firm that you have just selected. Answer: following are the unlevered betas for the Pure Play firms. Unlevered Asset beta Hilton Hotels Holiday Corp. La Quinta Motor Inns. Ramada Inns.

0.65 0.30 0.28 0.49

5. What is the average unlevered beta of these pure play firms betas. Answer: the average of unlevered beta is following: we sum all pure plays division unlevered betas and divide by the total number of division with 4. Average Unlevered beta 0.43

Formula of leveraged beta ΒL = βU[ 1 + (1-t)(D/E)] We are supposed to select levered Beta by selecting the unlevered beta because company has changed the debt portion. Whenever company changes the portion of debt and equity we first identify unlevered beta by considering debt “zero”. We have selected levered beta 1.21 because of calculating the cost of capital. Levered Beta Unlevered asset beta Target debt ratio (Table A) Levered Equity beta

0.42 74% 1.21

6. What is the cost of equity in 1998? Answer: The cost of equity in 1998 is following. We have calculated the cost t of equity by the formula following: Cost of equity: Risk free rate + Asset beta multiply with market risk premium. Risk free rate is bonds yield which is 8.95% and beta is 1.21 we have calculated above. And risk premium is 7.43% which is market risk premium minus risk free rate. After cost of equity is 17.95% Cost f equity Riskless rate Levered Equity beta Risk Premium Cost of Equity

8.95% 1.21 7.43% 17.95%

7. what is the cost of debt for lodging? Answer: The cost of debt for the lodging is following. We have calculated the cost of lodging as long-term American treasury bonds which YTM is 8.95% plus 1.1% as long term rate. Cost of debt Cost of long term Bonds Debt of lodging over and above Long term rate Cost of debt

8.95% 1.10% 10.05%

8. What is the cost of capital?

Answer: As we have calculated the cost of equity and cost of debt above. Here we consider the tax rate 35% and portion of the debt is .74 and equity .26 following. We put values in formulas and we get calculation. As 9.58%

Equity Debt Tax rate WACC

Cost Weights 17.95% 0.26 10.05% 0.74 0.34 9.58%

9. List the pure play you have selected in order to determine the beta of the restaurants division? Answer: Church's Fried Chicken Collins Foods Frisch's Luby's McDonald's Wendy 10. What are the Unlevered betas of each Pure Play firm that you have just selected. Answer: following are the unlevered betas for the Pure Play firms.

Church's Fried Chicken Collins Foods Frisch's Luby's McDonald's Wendy

Unlevered Asset beta 1.392 1.305 0.5358 0.7524 0.7238 1.0428

11. What is the average unlevered beta of these pure play firms betas. Answer: the average of unlevered beta is following: we sum all pure plays division unlevered betas and divide by the total number of division with 6. Average Unlevered Asset beta 0.96

12. What is the cost of equity in 1998? Answer: The cost of equity in 1998 is following. We have calculated the cost t of equity by the formula following:

Cost of equity: Risk free rate + Asset beta multiply with market risk premium. Risk free rate is bonds yield which is 8.72% and beta is 1.42 we have calculated above. And risk premium is 7.43% which is market risk premium minus risk free rate. After cost of equity is 19.26% Riskless rate Beta Risk premium Cost of Equity

8.72% 1.42 7.43% 19.26%

13. what is the cost of debt for restaurants? Cost of 10 year bonds Cost of debt over and above bonds Cost of debt over and above

8.72% 1.8%

10.52%

The cost of debt for the restaurants is following. We have calculated the cost of restaurants as long-term American treasury bonds which YTM is 8.72% plus 1.8% as long term rate.

14. What is the cost of capital? Answer: the cost of capital is 14.09% . Cost Equity Debt Tax rate WACC

19.26% 10.52% 34.00% 14.09%

Weights 58.00% 42.00%

15. What is the service division beta? Also show the weights. Answer: Here we calculated the betas of all three division the provide the weights according to the case. These weights are .62 for lodging and .28 catering service and .1 for rwstaurants. Then we multiply these with bets and get the service beta devision. following

Division

Lodging Catering services

Identifiable Weights Assets (million of $) 2777.4 1237.7

0.62 0.28

Asset beta

0.42

Restaurants Marriott as a whole

467.6

0.10

0.96 0.65

4482.7 Asset beta of Contract services

1.049003