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Financial Management II

Assignment -2
Marriott Corporation – The Cost of
Capital
Faculty: Prof. Abhilash S Nair
Submitted By:
Arshdeep Singh
Amit Kumar
Ashish Dennis Dean
Vimal Mohan Jain
Calculating WACC for Marriot
Marriot has three divisions :
Lodging
Restaurant
Contract services
Financial Strategy of Marriott
Manage 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 Beta
Asset beta = (E/V) * Equity beta

E = Market value of equity


V = Market value of company
= Market value of equity + Market value
of Debt
WACC for Marriott Corporation
Levered equity beta = 0.97
Market leverage = 0.41
Unlevered asset beta = (1-0.41)*0.97
= 0.57
Target debt/value = 0.60
Levered equity beta = 0.57/(1-0.60)
= 1.43
WACC for Marriott Corporation
Keq = 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 Beta
Hilton 0.14 0.88
0.76
Holiday 0.79 1.46 0.31
La Quinta 0.69 0.38 0.12
Ramada 0.65 0.95 0.34

Average asset beta = 0.38


WACC for Lodging Division
Unlevered asset beta = 0.38
Target debt/value = 0.74
Levered equity beta = 0.38/(1-0.74) = 1.46
Keq = 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 Beta
CFC 0.04 0.75 0.72
CFI 0.10 0.60 0.54
FR 0.06 0.13 0.12
LC 0.01 0.64 0.63
Mc 0.23 1.00 0.77
WI 0.21 1.08 0.85

Average asset beta = 0.61


WACC for Restaurant Division
Unlevered asset beta = 0.61
Target debt/value = 0.42
Levered equity beta = 0.61/(1-0.42) = 1.05
Keq = 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
Division
There 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

βM
A = ( V /
L MV ) * β L + (V / V ) * βR + (V / V ) * βCS
A R M A CS M A
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
Division
Unlevered asset beta = 0.98
Target debt/value = 0.40
Levered equity beta = 0.98/(1-0.40) = 1.63
Keq = 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%