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Submitted by Brunovieira00 on May 4, 2008
Category: Business
Words: 683 | Pages: 3
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After analysing the case and dividing all the information by the three divisions (Risk premium, Risk free, Cost of Debt and ratios debt/equity), we started by finding βb.
The risk free (Rf) can be estimated as the average or expected rate of return on treasury bills or bonds in the future.
For the cost of debt, we use different rates for the three divisions, since Marriott uses the cost of long term debt for its lodging cost of capital calculations and short term debt for the other two divisions.
The risk premium and the ratios debt/equity where taken from the table A.
Using Rb = Rf + βb (Risk Premium), we could find the different βb for the three divisions.
Now we had all the necessary information to calculate the cost of capital and the cost of equity.
Rs = Rf + βs (Risk Premium)
Rb = Rf + βb (Risk Premium)
Furthermore, we calculate also the beta of the portfolio, which is the average of the betas of the assets that are present in that same portfolio:
Βa = (B/B+S)*βb + (S/B+S)*βs
When firms like Marriott use both debt and equity to finance their operations, we can compute a weighted average cost of capital, using the cost of capital and equity already found. In this case, the firm pays also corporate taxes.
Rwacc = (1-Tc)*Rb*(B/B+S) + Rs*(S/B+S)
Therefore, after all the calculations, we found three different Rwacc:
5,26% 4,85% 4,65%
For the lodging, contract services and restaurant respectively.
The lodging cost of capital Rwacc, is higher than the other two, because the ratio debt/equity is much different, using more debt than equity to finance their operations. The other two are similar because they have a 50%-50% ratio between debt and equity.
One of the two major components of WACC is the cost of equity. The cost of equity model takes into account three values which we...
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