Marriott Case Hbs

Issue In this assignment, we are asked to see the WACC of Marriott corpo ration and all(prenominal) of the societys three portions. Our approach is outlined in the next section. We made a series of assumptions regarding either the available selective instruction or the missing information. This has been explained below, in a divorce section. Approach We applied the following formulae to prefigure the WACC Our assumptions are explained in the next section. The duck below presents the approach for calculations at pot level and portion level fit in to severally of the variables.Marriotts capital complex body part comprises debt ( frosty and floating) and paleness. Marriott CorporationBusiness Lines 1Beta of Debt (? d)Computed using correlation amidst S&P euchre returns and HG Corp Bonds (recent history is implicitly more weighted), s. d. of the S&P500 and s. d. of the HG Corp Bonds ( demonst site 4)Same 2Risk-Free RateEstimated to be equal to 10y US Gov refer Rate as o f April 1988 (Table B)Same 3Current LeverageUsing financial statements (Exhibit 1), we boded the mart apprise of debt and divided by commercialize value of assets. securities industry value of debt is estimated to be equal to its hold back value.Market value of assets is equal to food market value of debt + market value of equity (number of outstanding personas * price per share)N/A 4Market Risk PremiumFrom table of returns (Exhibit 5), taken as the average of spread between localizes of return for S&P500 and LT US Gov Bonds, 1926-87Same 5Tax RateEstimated from data in exhibit 1, from ratio between income before levy and realize income for year 1987Same 6Beta of rightfulness (? E), Unlevered ? E Levered tin be gear up in Exhibit 3 for the electric current debt load. Using the current leverage ratio (Step 3), we calculate the unlevered ? E.Having found unlevered equity genus Betas of comparables from their leverage ratio and levered ? E (Exhibit 3), we averaged the un levered ? E to get the unlevered ? E for each Marriott division. Restaurants division was mapped on Restaurants comparables, Lodging on Hotels whilst Contract Services was implied from Marriotts and new(prenominal) two divisions unlevered ? E and their respective share in total assets book value. 7Cost of Equity (RL)We recalculated the new Levered ? E based on target leverage of Marriott (Table A) then, combine the Levered ? E, stake free vagabond, and MRP to calculated the cost of equity using CAPM relationship.Same, except unlevered beta from antecedent tint was use to calculate levered beta. 8Cost of Debt (RD)See step 7, using Beta DebtSame 9WACCWACC formula bill for ITS correctionSame, respective target leverage ratios and a ? D equal to Marriotts ? D were employ to estimate WACC. Assumptions Overall Assumptions Although we consider an ITS, we do not have the data to calculate individual ITS for each division and Marriott. As a result, we happen upon E*=E (rather than E *=E+ITS) and that the ITS is as risky as debt. We assume debt is changeless and no growth. Beta of Debt Although Marriott is one sign of the zodiac, we assume it is fairly comparable to a generic HG Corp, with single A rating. hence we performed a linear regression on the rate of returns of HG Corporate Bonds against S&P 500 rate of returns, as a substitute of the market portfolio rate of returns. Risk-free rate The 10Yr UST is sham to be the best estimate at company and division level. Ideally, each capital rise should be discounted using a judicature bond with the same adulthood. For this study, the selection of the maturity should one that matches best the entire cash flow stream being valued.Also, 1Yr rate is very volatile and 30Y illiquid and thus on that point is support built therein. We have imitation that the rank provided in Table B are for zero-coupon bonds, and USD. Current leverage Market value of debt is estimated to be equal to its book value. The firm i s HG, risk premium for HG bonds is relatively low, and we have no information on coupon level of fixed rate debt. The floating rate debt is seeming to trade close to par. For subsequent calculations, we in addition faux the average maturity at five years. There is only long debt for us to consider. Market risk premium In the same fashion that we estimate the risk free rate bench mark is 10y UST Bond Interest Rate, so we used the difference of average returns between LT UST Bonds and S&P 500 for the period 1926-87, the extended history available we have. We are conscious(predicate) of the imperfection of using historical rates of return. Average corporate tax rate We assume that the rate calculated as the average rate applied to 1987 is a reasonable placeholder for future tax rate. Tax rate is applicable crosswise divisions. Cost of Debt S&P 500 is also considered to be best proxy available for market portfolio.We also assumed no financial distress, which is reasonable because firm has real assets and overhead cost is 3% of revenue. Competitors and divisions have the same debt beta as Marriott Beta equity of each division it has been assumed that the unlevered beta equity of each division is comparable to the average of unlevered beta equity of the comparables identified in the case for each relevant business segment. weight down average of book value of assets was used to determine the unlevered beta of Contract Division, we assumed this to be a reasonable proxy instead of market value of assets.