Essay about Marriott Case Study Harvavd Business Review

1414 Words Nov 14th, 2011 6 Pages
Case questions • What is the cost of capital for Marriott’s as a whole at the prevailing capital structure vs. at the target capital structure. ➢ Be prepared to defend your specific assumptions about the various inputs adopted into equations. For example, the team is expected to suggest the proposed market risk premium. ➢ WACC should be estimated for the overall firm ▪ CAPM – equity beta vs. asset beta - see Section F • Compute a separate cost of capital (WACC) for the lodging business, contract services business and restaurant business. ➢ How was cost of debt measured of each division? Should the cost of debt differ across three divisions? Why? ➢ What is/are suitable …show more content…
Government interest rates from Table B, 8.72%. The 10 year rate was chosen to be consistent with time lengths. Then the value for equity, debt and the firm need to be calculated, this is a simple step. The market price of the shares is multiplied by the number of outstanding shares to find the value of equity and the book value of long term debt is used for the value of debt and the value of both equity and debt are added together to come up with the value of the firm. The weight of the equity and debt can now be calculated by dividing the value of equity or debt by the value of the company. Lastly, the tax rate was calculated by using the balance sheet, given in exhibit 1, to determine income taxes paid and dividing it by earnings before interest and taxes for each of the last ten years then by taking the average of the ten years tax rates. Once the prevailing WACC rate was found, the target WACC was calculated to be 9.00%. Again the CAPM model was used but a new the required rate of return on equity needed to be calculated. Since there is a change in the capital structure an unlevered beta needed to be determined. The Hamada equation was used to unlever the beta, which had a debt to equity ratio of .70, then to re-lever it again with a debt to equity ratio of 1.5; this changed the beta from