WACC (Divisional Discount or Hurdle R

Four Key Elements of WACC

1 - Unlevered Beta
2- Levered Beta
3- Cost of Equity
4- Cost of Debt
5- Tax Rate

Unlevered U Estimati

Unlevered = Levered Equity

Sector
Marriot Corporation

Equity
1.11

Lodging
HILTON HOTELS CORPORATION

0.76

(owns, manages, and licenses hotels.

Operates casinos.)

HOLIDAY CORPORATION
(Owns, operates, and licenses hotels and restaurants.

1.35

Operates casinos.)

LA QUINTA MOTOR INNS

0.89

(Owns, operates, and licenses motor inns.)

RAMADA INNS, INC.

1.36

(Owns and operates hotels and restaurants.)

Restaurants
CHURCH'S FRIED CHICKEN

1.45

(owns and franchises restaurants and gaming businesses.)

COLLINS FOODS INTERNATIONAL

1.45

(Operates Kentucky Fried Chicken franchise

and moderately prices restaurants.)

FRISCH'S RESTAURANTS

0.57

(Operates and franchises restaurants.)

LUBY'S CAFETERIAS

0.76

(Operates Cafeterias.)

MCDONALD'S

0.94

(Operates, franchises, and services restaurants.)

WENDY'S INTERNATIONAL
(Operates, franchises, and services restaurants.)

1.32

Contract & Services

Note : In order to find contract & services beta, we opt weighted average approach in which weight
identifiable asset
Division
Marriot
Lodging
Restaurant
Contract & Services

Total Identifiable Asset

4582.7
4582.7
4582.7
4582.7

M = WLL+WRR+WCC
C = 1.132

levered L Estimation

levered = UnLevered / Equity

Unlevered

Sector
Marriot
Lodging
Restaurant
Contract & Services

0.6549
0.422
0.959
1.132

Cost of Equity Estimat

Cost of Equity = Risk Free Rate + L (Marke

Where Market Risk Premium = Expected Market
Note : Expected Market Rate = 12.01% (exhibit 4)
Risk Free Rate
8.95%
8.95%
8.72%
8.72%

Marriot
Lodging
Restaurant
Contract & Sevices

Cost of Debt Estimati

Cost of Debt = Risk free Rate + Debt Ra

Risk Free Rate
8.95%
8.95%
8.72%
8.72%

Marriot
Lodging
Restaurant
Contract & Sevices

Tax Rate Estimation

Period
1978

Tax Rate = Income Tax / Income Before Interest T

Income Taxes
35.4

1979
1980
1981
1982
1983
1984
1985
1986
1987

43.8
40.6
45.2
50.2
76.7
100.8
128.3
168.5
175.9

Weighted Average Cost of Cap

Marriot
Lodging
Restaurants
Contract & Services

WACC = (1-tax rate)xCost of Debt x (D/V) + Cost of Equi

Tax Rate
0.42
0.42
0.42
0.42

Conclusion : The hurdle rate that marriot should use is 9.15%. This rate is subjected to variations in
then this hurdle rate sould be accounted for this change.

scount or Hurdle Rate) Calculations

ered U Estimation

= Levered Equity Ratio

Market Leverage Ratio
D/E+D

Equity Ratio
E/D+E

Unlevered

41%

59%

0.6549

14%

86%

0.6536

79%

21%

0.2835

69%

31%

0.2759

65%

35%

0.476

Lodging Average

0.422

4%

96%

1.392

10%

90%

1.305

6%

94%

0.5358

1%

99%

0.7524

23%

77%

0.7238

21%

79%

1.0428

Restaurants Average

0.959

proach in which weight corresponds to assets ratio i.e. divisional identifiable asset/total

Divisional Identifiable Asset

2777.4
1237.7
567.7

Weight
0.606
0.270
0.124

Unlevered U
0.655
0.422
0.959
?

red L Estimation

= UnLevered / Equity Ratio

levered

Target Leverage Raios

Equity Ratio

60%
74%
40%
42%

40%
26%
60%
58%

1.637
1.624
1.598
1.952

L
1.637
1.624
1.598
1.952

COE
13.96%
13.92%
13.98%
15.14%

f Equity Estimation

k Free Rate + L (Market Risk Premium)

um = Expected Market Rate - Risk Free Rate
Market Risk Premium
3.06%
3.06%
3.29%
3.29%

of Debt Estimation

isk free Rate + Debt Rate Premium

Debt Rate Premium
1.30%
1.10%
1.40%
1.80%

Cost of Debt
10.25%
10.05%
10.12%
10.52%

Rate Estimation

come Before Interest Tax

IBIT
83.5

Tax Rate (%)

42.40

105.6
103.5
121.3
133.7
185.1
236.1
295.7
360.2
398.9

41.48
39.23
37.26
37.55
41.44
42.69
43.39
46.78
44.10

Average Tax Rate

41.63

age Cost of Capital (WACC)

t x (D/V) + Cost of Equity x (E/V)

Cost of Debt
10.25%
10.05%
10.12%
10.52%

D/V
0.6
0.74
0.4
0.42

Cost of Equity
13.96%
13.92%
13.98%
15.14%

ubjected to variations in market risk premium. Moreover, if government interest rate changes,

E/V
0.4
0.26
0.6
0.58

WACC
9.15%
7.93%
10.73%
11.34%