What is the weighted average cost of capital (WACC) for Marriott Corporation, under target capital structure?...
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What is the weighted average cost of capital (WACC) for Marriott Corporation, under target capital structure? Hints for question 2: a) Beta of Marriott is given in the case. This is a levered beta. By using actual L (in 1987), compute unlevered beta. Beta unlevered = (E/V)* Beta levered =(1-L)*Beta levered b) By using the target capital structure (L), compute the Beta levered. Beta levered = (1/(1-L))*Beta unlevered. c) Using CAPM, calculate cost of equity. All inputs of CAPM are as in question 1, except beta. Use the beta you calculated under target capital structure (in part b) here. d) Compute the WACC using: WACC = wara(1T) + WsIs. Table A Market-Value Target-Leverage Ratios and Credit Spreads for Marriott and Its Divisions Marriott Lodging Contract services Restaurants Debt Percentage in Capital 60% 74% 40% 42% Fraction of Debt at Floating 40% 50% 40% 25% Fraction of Debt at Fixed 60% 50% 60% 75% Debt Rate Premium Above Government 1.30% 1.10% 1.40% 1.80% Table B lists the interest rates on fixed-rate U.S. government securities in April 1988. Table B U.S. Government Interest Rates in April 1988 Maturity 30-year 10-year 1-year Rate 8.95% 8.72% 6.90% Exhibit 1 Financial History of Marriott Corporation (dollars in millions, except per share amounts) 1982 Summary of Operations Sales Earnings before interest expense and income taxes Interest expense Income before income taxes Income taxes Income from continuing operations Net income Funds provided from cont. operationsb Capitalization and Returns Total assets Total capital Ⓒ Long-term debt Percent to total capita Shareholders' equity Per Share and Other Data Earnings per share: Continuing operations" Net income Cash dividends Shareholders' equity Market price at year end Shares outstanding (in millions) Return on avg. shareholders' equity 1978 1,174.1 107.1 23.7 83.5 35.4 48.1 54.3 101.2 1.000.3 826.9 309.9 37.5% 418.7 NO 1979 1,426.0 133.5 27.8 105.6 43.8 61.8 71.0 117.5 1,080.4 891.9 365.3 41.0% 413.5 1980 1,633.9 150.3 46.8 103.5 40.6 62.9 72.0 125.8 45 52 042 2.49 6.35 125.3 23.8% 1981 1,905.7 173.3 52.0 121.3 45.2 76.1 86.1 160.8 1,454.9 4999 $387 24746 57 64 051 3.22 7.18 130.8 23.4% 2,458.9 205.5 71.8 133.7 50.2 83.5 94.3 203.6 54.4% 516.0 .61 .69 063 1983 3.89 11.70 132.8 20.0% 2,950.5 247.9 62.8 185.1 2,062.6 2.501.4 1,634.5 2.007.5 889.3 1,071.6 76.7 108.4 115.2 272.7 53.4% 628 2 78 83 076 4.67 14.25 134.4 20.0% 1984 2,904.7 2,330.7 1.115.3 3,524.9 4,241.7 5,266.5 297.7 420.5 61.6 60.3 236.1 360.2 100.8 168.5 135.3 191.7 139.8 191.7 322.5 430.3 47.9% 675.6 1.00 1.04 093 5.25 1985 14.70 128.8 22.1% 371.3 75.6 295.7 128.3 167.4 167,4 372.3 1986 3,663.8 4,579.3 2,861.4 3,561.8 1,192.3 1,662.8 41.7% 46.7% 848.5 991.0 1.24 1.24 113 6.48 21.58 131.0 22.1% 1.40 1.40 136 7.59 29.75 130.6 20.6% 1987 6.522.2 489.4 90.5 398.9 175.9 223.0 223.0 472.8 5,370.5 4,247.8 2,498,8 58.8% 810.8 1.67 1.67 17 6.82 30.00 118.8 22.2% Exhibit 2 Financial Summary of Marriott by Business Segment, 1982-1987 (dollars in millions) Lodging: Sales Operating profit Identifiable assets Depreciation Capital expenditures Contract Services: Sales Operating profit Identifiable assets Depreciation Capital expenditures Restaurants: Sales Operating profit Identifiable assets Depreciation Capital expenditures 1982 $1,091.7 132.6 909.7 22.7 371.5 819.8 51.0 373.3 22.9 127.7 1983 547.4 48.5 452.2 25.1 199.6 ?/ 950.6 1,111.3 71.1 86.8 391.6 403.9 26.1 43.8 1984 $1,320.5 $1,640.8 $1,898.4 $2,233.1 $2,673.3 139.7 161.2 185.8 263.9 1,264.6 1,786.3 2,108.9 2,777.4 27.4 32.4 43.9 377.2 808.3 1,241.9 679.4 63.8 483.0 31.8 65.0 31.3 366.4 28.9 55.6 707.0 79.7 1985 496.7 35.5 72.3 118.6 624.4 40.2 125.9 1986 757.0 78.2 1,586.3 2,236.1 154.9 1,070.2 582.6 34.8 128.4 215.7 2,236.7 37.1 966.6 61.1 448.7 797.3 79.1 1987 562.3 38.1 64.0 2,969.0 170.6 1,237.7 75.3 112.7 879.9 82.4 567.6 42.1 79.6 Exhibit 3 Information on Comparable Hotel and Restaurant Companies MARRIOTT CORPORATION (Owns, operates, and manages hotels, restaurants, and airline and institutional food services.) Hotels: HILTON HOTELS CORPORATION (Owns, manages, and licenses hotels. Operates casinos.) HOLIDAY CORPORATION (Owns, manages, and licenses hotels and restaurants. Operates casinos.) LA QUINTA MOTOR INNS (Owns, operates, and licenses motor inns.) RAMADA INNS, INC. (Owns and operates hotels and restaurants.) Restaurants: CHURCH'S FRIED CHICKEN (Owns and franchises restaurants and gaming businesses.) COLLINS FOODS INTERNATIONAL (Operates Kentucky Fried Chicken franchise and moderately priced restaurants.) FRISCH'S RESTAURANTS (Operates and franchises restaurants.) LUBY'S CAFETERIAS (Operates cafeterias.) MCDONALD'S (Operates, franchises, and services restaurants.) WENDY'S INTERNATIONAL (Operates, franchises, and services restaurants.) Arithmetica Average Return 22.4% -3.2 20.3 56.9 15.1 22.5 4.6 Equityb Market Beta 89 or Copy 1.36 1.45 1.45 57 .76 94 Leverage 1.32 69% 65% 10% 6% 1% 23% c 1987 Revenues ($ billions) 21% 6.52 0.77 1.66 0.17 0.75 0.39 0.57 0.14 0.23 4.89 1.05 Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987 Years Short-term Treasury bills: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Long-term U.S. government bond returns: 1926-87 1926-50 1951-75 1976-80 1980-85 1986 1987 Long-term, high-grade corporate bonds returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Standard & Poor's 500 Composite Stock Index returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Arithmetic Average 3.54% 1.01% 3.67% 7.80% 10.32% 6.16% 5.46% 4.58% 4.14% 2.39% 1.95% 17.85% 24.44% -2.69% 5 5.24% 4.82% 3.05% 2.70% 18.96% 19.85% -0.27% 12.01% 10.90% 11.87% 14.81% 15.49% 18.47% 5.23% Standard Deviation 0.94% 0.40% 0.56% 0.83% 0.75% 0.19% 0.22% 7.58% 4.17% 6.45% 11.15% 14.26% 17.30% 10.28% 6.97% 3.45% 6.04% 10.87% 14.17% 8.19% 9.64% 20.55% 27.18% 13.57% 14.60% 13.92% 17.94% 30.50% Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates Years Spread between S&P 500 Composite returns and short-term U.S. Treasury bill returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Spread between S&P 500 Composite returns and long-term U.S. government bond returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Spread between S&P 500 Composite returns and long-term, high-grade corporate bonds: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Arithmetic Average 8.47% 9.89% 8.20% 7.01% 5.17% 12.31% -0.23% 7.43% 6.76% 9.48% 12.86% -2.36% -5.97% 7.92% OF 6.77% 6.06% 8.82% 12.11% -3.47% -1.38% 5.50% Standard Deviation 20.60% 27.18% 13.71% 14.60% 14.15% 17.92% 30.61% 20.78% 26.94% 14.35% 15.58% 13.70% 14.76% 35.35% 20.31% 26.70% 13.15% 15.84% 13.59% 14.72% 34.06% What is the weighted average cost of capital (WACC) for Marriott Corporation, under target capital structure? Hints for question 2: a) Beta of Marriott is given in the case. This is a levered beta. By using actual L (in 1987), compute unlevered beta. Beta unlevered = (E/V)* Beta levered =(1-L)*Beta levered b) By using the target capital structure (L), compute the Beta levered. Beta levered = (1/(1-L))*Beta unlevered. c) Using CAPM, calculate cost of equity. All inputs of CAPM are as in question 1, except beta. Use the beta you calculated under target capital structure (in part b) here. d) Compute the WACC using: WACC = wara(1T) + WsIs. Table A Market-Value Target-Leverage Ratios and Credit Spreads for Marriott and Its Divisions Marriott Lodging Contract services Restaurants Debt Percentage in Capital 60% 74% 40% 42% Fraction of Debt at Floating 40% 50% 40% 25% Fraction of Debt at Fixed 60% 50% 60% 75% Debt Rate Premium Above Government 1.30% 1.10% 1.40% 1.80% Table B lists the interest rates on fixed-rate U.S. government securities in April 1988. Table B U.S. Government Interest Rates in April 1988 Maturity 30-year 10-year 1-year Rate 8.95% 8.72% 6.90% Exhibit 1 Financial History of Marriott Corporation (dollars in millions, except per share amounts) 1982 Summary of Operations Sales Earnings before interest expense and income taxes Interest expense Income before income taxes Income taxes Income from continuing operations Net income Funds provided from cont. operationsb Capitalization and Returns Total assets Total capital Ⓒ Long-term debt Percent to total capita Shareholders' equity Per Share and Other Data Earnings per share: Continuing operations" Net income Cash dividends Shareholders' equity Market price at year end Shares outstanding (in millions) Return on avg. shareholders' equity 1978 1,174.1 107.1 23.7 83.5 35.4 48.1 54.3 101.2 1.000.3 826.9 309.9 37.5% 418.7 NO 1979 1,426.0 133.5 27.8 105.6 43.8 61.8 71.0 117.5 1,080.4 891.9 365.3 41.0% 413.5 1980 1,633.9 150.3 46.8 103.5 40.6 62.9 72.0 125.8 45 52 042 2.49 6.35 125.3 23.8% 1981 1,905.7 173.3 52.0 121.3 45.2 76.1 86.1 160.8 1,454.9 4999 $387 24746 57 64 051 3.22 7.18 130.8 23.4% 2,458.9 205.5 71.8 133.7 50.2 83.5 94.3 203.6 54.4% 516.0 .61 .69 063 1983 3.89 11.70 132.8 20.0% 2,950.5 247.9 62.8 185.1 2,062.6 2.501.4 1,634.5 2.007.5 889.3 1,071.6 76.7 108.4 115.2 272.7 53.4% 628 2 78 83 076 4.67 14.25 134.4 20.0% 1984 2,904.7 2,330.7 1.115.3 3,524.9 4,241.7 5,266.5 297.7 420.5 61.6 60.3 236.1 360.2 100.8 168.5 135.3 191.7 139.8 191.7 322.5 430.3 47.9% 675.6 1.00 1.04 093 5.25 1985 14.70 128.8 22.1% 371.3 75.6 295.7 128.3 167.4 167,4 372.3 1986 3,663.8 4,579.3 2,861.4 3,561.8 1,192.3 1,662.8 41.7% 46.7% 848.5 991.0 1.24 1.24 113 6.48 21.58 131.0 22.1% 1.40 1.40 136 7.59 29.75 130.6 20.6% 1987 6.522.2 489.4 90.5 398.9 175.9 223.0 223.0 472.8 5,370.5 4,247.8 2,498,8 58.8% 810.8 1.67 1.67 17 6.82 30.00 118.8 22.2% Exhibit 2 Financial Summary of Marriott by Business Segment, 1982-1987 (dollars in millions) Lodging: Sales Operating profit Identifiable assets Depreciation Capital expenditures Contract Services: Sales Operating profit Identifiable assets Depreciation Capital expenditures Restaurants: Sales Operating profit Identifiable assets Depreciation Capital expenditures 1982 $1,091.7 132.6 909.7 22.7 371.5 819.8 51.0 373.3 22.9 127.7 1983 547.4 48.5 452.2 25.1 199.6 ?/ 950.6 1,111.3 71.1 86.8 391.6 403.9 26.1 43.8 1984 $1,320.5 $1,640.8 $1,898.4 $2,233.1 $2,673.3 139.7 161.2 185.8 263.9 1,264.6 1,786.3 2,108.9 2,777.4 27.4 32.4 43.9 377.2 808.3 1,241.9 679.4 63.8 483.0 31.8 65.0 31.3 366.4 28.9 55.6 707.0 79.7 1985 496.7 35.5 72.3 118.6 624.4 40.2 125.9 1986 757.0 78.2 1,586.3 2,236.1 154.9 1,070.2 582.6 34.8 128.4 215.7 2,236.7 37.1 966.6 61.1 448.7 797.3 79.1 1987 562.3 38.1 64.0 2,969.0 170.6 1,237.7 75.3 112.7 879.9 82.4 567.6 42.1 79.6 Exhibit 3 Information on Comparable Hotel and Restaurant Companies MARRIOTT CORPORATION (Owns, operates, and manages hotels, restaurants, and airline and institutional food services.) Hotels: HILTON HOTELS CORPORATION (Owns, manages, and licenses hotels. Operates casinos.) HOLIDAY CORPORATION (Owns, manages, and licenses hotels and restaurants. Operates casinos.) LA QUINTA MOTOR INNS (Owns, operates, and licenses motor inns.) RAMADA INNS, INC. (Owns and operates hotels and restaurants.) Restaurants: CHURCH'S FRIED CHICKEN (Owns and franchises restaurants and gaming businesses.) COLLINS FOODS INTERNATIONAL (Operates Kentucky Fried Chicken franchise and moderately priced restaurants.) FRISCH'S RESTAURANTS (Operates and franchises restaurants.) LUBY'S CAFETERIAS (Operates cafeterias.) MCDONALD'S (Operates, franchises, and services restaurants.) WENDY'S INTERNATIONAL (Operates, franchises, and services restaurants.) Arithmetica Average Return 22.4% -3.2 20.3 56.9 15.1 22.5 4.6 Equityb Market Beta 89 or Copy 1.36 1.45 1.45 57 .76 94 Leverage 1.32 69% 65% 10% 6% 1% 23% c 1987 Revenues ($ billions) 21% 6.52 0.77 1.66 0.17 0.75 0.39 0.57 0.14 0.23 4.89 1.05 Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987 Years Short-term Treasury bills: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Long-term U.S. government bond returns: 1926-87 1926-50 1951-75 1976-80 1980-85 1986 1987 Long-term, high-grade corporate bonds returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Standard & Poor's 500 Composite Stock Index returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Arithmetic Average 3.54% 1.01% 3.67% 7.80% 10.32% 6.16% 5.46% 4.58% 4.14% 2.39% 1.95% 17.85% 24.44% -2.69% 5 5.24% 4.82% 3.05% 2.70% 18.96% 19.85% -0.27% 12.01% 10.90% 11.87% 14.81% 15.49% 18.47% 5.23% Standard Deviation 0.94% 0.40% 0.56% 0.83% 0.75% 0.19% 0.22% 7.58% 4.17% 6.45% 11.15% 14.26% 17.30% 10.28% 6.97% 3.45% 6.04% 10.87% 14.17% 8.19% 9.64% 20.55% 27.18% 13.57% 14.60% 13.92% 17.94% 30.50% Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates Years Spread between S&P 500 Composite returns and short-term U.S. Treasury bill returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Spread between S&P 500 Composite returns and long-term U.S. government bond returns: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Spread between S&P 500 Composite returns and long-term, high-grade corporate bonds: 1926-87 1926-50 1951-75 1976-80 1981-85 1986 1987 Arithmetic Average 8.47% 9.89% 8.20% 7.01% 5.17% 12.31% -0.23% 7.43% 6.76% 9.48% 12.86% -2.36% -5.97% 7.92% OF 6.77% 6.06% 8.82% 12.11% -3.47% -1.38% 5.50% Standard Deviation 20.60% 27.18% 13.71% 14.60% 14.15% 17.92% 30.61% 20.78% 26.94% 14.35% 15.58% 13.70% 14.76% 35.35% 20.31% 26.70% 13.15% 15.84% 13.59% 14.72% 34.06%
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Calculating Cost of Equity Marriott Corp utilizes the Capital Asset Pricing Model CAPM to derive the... View the full answer
Related Book For
Intermediate Financial Management
ISBN: 9780357516669
14th Edition
Authors: Eugene F Brigham, Phillip R Daves
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