Marriott Case

1167 WordsOct 6, 20095 Pages
Finding Marriott’s WACC To calculate the WACC we need to identify the different factors included in the WACC-method, to be able to measure the opportunity cost for investments. First we need to identify the debt, equity and the firm value, which is equity plus debt. Then we identify the debt cost (rD), which is a pre-tax cost, and then we need to identify the cost of equity (rE). As we can observe in table A, the debt percentage in capital is 60 %, which implies that the equity is 40 %. By dividing the income taxes by the company’s income before taxes, we find that t = 175,9 / 398,9 = 0,44 To find the risk-free rate, we chose to use the arithmetic average on long-term U.S. government bond returns for the longest time period…show more content…
government rates to find the risk-free rate (table B), which is 8,95%, and according to table A, the spread for such an investment is 1,10%. rD for lodging division = 8,95% + 1,10% = 10,05%. We think that the financing of the restaurant division is a bit different. Since we’re told that Marriott in a higher degree uses more short-term debt to finance this division, we use only 10-year interest rates, which, according to table B is 8,72%. The restaurant-division has a significantly higher spread, which is 1,80%. rD for restaurant division = 8,72% + 1,80% = 10,52%. These are only the fixed part of the cost of debt. For the floating part of the debt we use one-year bonds. This means that the floating part of the cost of debt is for the lodging division 6,90% + 1,10% = 8,00%, and for the restaurant division it’s 6,90% + 1,80% = 8,70%, due to the different spreads. The lodging division has 50% fixed debt rate and 50 % floating rate, whilst the restaurant division has 25% floating rate and 75% fixed rate. These numbers gives the following calculation for the different costs of debt: Lodging cost of debt: 50% * 8,00% + 50% * 10,05% = 9,025% Restaurant cost of debt: 75% * 8,70% + 25% * 10,52% = 10,065% These different divisions need a different cost of debt because of the fact that assets in the restaurant and contracting services have shorter useful lives. Marriott also
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