Marriott Corporation: The Cost of Capital

Asset beta for Lodging

Hilton Hotels
Holiday Corporation
La Quinta Motor Inns
Ramada Inns, Inc
Average

Market Value of Leveraged

Leverage
Equity Beta
0.14
0.79
0.69
0.65

0.76
1.35
0.89
1.36

0.04
0.1
0.06
0.01
0.23
0.21

1.45
1.45
0.57
0.76
0.94
1.32

Weighted Average (by Sales) Asset beta

Asset Betas for Restaurants

C's Fried Chicken
Collins Foods International
Frisch's Restaurants
Luby's Cafeterias
McDonald's
Wendy's International
Average

Weighted Average (by Sales) Asset beta

Unleveraged Asset Beta

1987 Revenues
0.69
0.77
0.41
1.66
0.38
0.17
0.64
0.75
0.53

0.53

1.41
1.36
0.55
0.76
0.80
1.14
1.00

0.92

0.39
0.57
0.14
0.23
4.89
1.05

Marriott Corporation: The Cost of Capital

WACC for Marriott Corporation
Unlever the Beta
Levered Equity beta
Actual Debt / Value ratio
Unlevered Asset beta

1.11
41.22%
0.78

Lever the Asset beta

Unlevered Asset beta
Target Debt / Value ratio
Levered Equity beta

0.78
60%
1.48

Equity Cost of Capital

Risk free rate - Yield on 30-years US T-bonds
Average Market Risk Premium (1926-1987)
Levered Equity beta
Cost of Equity using CAPM
Cost of Debt
Risk free rate - Yield on 30-years US T-bonds
Credit spread - Premium for Credit Risk

WACC

8.95%
7.43%
1.48
19.98%

8.95%
1.30%
10.25%
11.68%

Marriott Corporation: The Cost of Capital

WACC for Lodging Division
Lever the Asset beta
Unlevered Asset beta
Target Debt / Value ratio
Levered Equity beta
Equity Cost of Capital
Risk free rate - Yield on 30-years US T-bonds
Average Market Risk Premium (1926-1987)
Levered Equity beta
Cost of Equity using CAPM
Cost of Debt
Risk free rate - Yield on 30-years US T-bonds
Credit spread - Premium for Credit Risk

WACC

0.53
74%
1.44

8.95%
7.43%
1.44
19.67%

8.95%
1.10%
10.05%
9.58%

Marriott Corporation: The Cost of Capital

WACC for Restaurant Division
Lever the Asset beta
Unlevered Asset beta
Target Debt / Value ratio
Levered Equity beta
Equity Cost of Capital
Risk free rate - Yield on 10-years US T-bonds
Average Market Risk Premium (1926-1987)
Levered Equity beta
Cost of Equity using CAPM
Cost of Debt
Risk free rate - Yield on 10-years US T-bonds
Credit spread - Premium for Credit Risk

WACC

0.92
42%
1.32

8.72%
7.43%
1.32
18.50%

8.72%
1.80%
10.52%
13.38%

Marriott Corporation: The Cost of Capital

WACC for Contract Services Division
Asset beta - Marriott Corporation
Asset beta - Lodging Division
Asset beta - Restaurant Division
Asset beta - Contract Services division
Identifiable Assets as a proxy for Market Value
Lodging Division
Restaurant Division
Contract Services division

Lever the Asset beta

Unlevered Asset beta
Target Debt / Value ratio
Levered Equity beta
Equity Cost of Capital
Risk free rate - Yield on 10-years US T-bonds
Average Market Risk Premium (1926-1987)
Levered Equity beta
Cost of Equity using CAPM
Cost of Debt
Risk free rate - Yield on 10-years US T-bonds
Credit spread - Premium for Credit Risk

WACC

0.78
0.53
0.92
1.17

909.7
373.3
452.2
1735.2

1.17
40%
1.64

8.72%
7.43%
1.64
20.88%

8.72%
1.40%
10.12%
14.96%

0.52
0.22
0.26

Marriott Corporation: The Cost of Capital

Marriott Corp.

Unlevered Asset beta

Debt / Value ratio
Levered Equity beta
Required rate of return on
debt
Cost of Equity
WACC

Lodging Division

Restaurant Divison

0.78
60%
1.48

0.53
74%
1.44

0.92
42%
1.32

10.25%
19.98%
11.68%

10.05%
19.67%
9.58%

10.52%
18.50%
13.38%

Contract Services

1.17
0.40
1.64
10.12%
20.88%
14.96%

Amazon, Inc. $1.25 billion Convertible Bonds Issue in 1999

Coupon
Credit Rating
CCC+
Par Value
Issued at discount
Interest Rate on
Plain Vanila Debt
for comparable
credit rating firm
Cash Flows
1/1/1999
6/30/1999
12/31/1999
6/30/2000
12/31/2000
6/30/2001
12/31/2001
6/30/2002
12/31/2002
6/30/2003
12/31/2003
6/30/2004
12/31/2004
6/30/2005
12/31/2005
6/30/2006
12/31/2006
6/30/2007
12/31/2007
6/30/2008
12/31/2008

4.75%
1000
980

11% Debt Component

Equity Component
-980
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
23.75
1023.75

$626.55
$353.45