ASSIGNMENT – 1
GROUP: 13 SECTION: AB GAURANG JHUNJHUNWALA
Using the M&E theory, we assumed that the leverage was constant and calculated the WACC for each segment of the corporation: 8.64% for Lodging, 10.35% for Restaurants and 9.74% for Contracts Services.. We understood that minor differences in the WACC would have a huge impact on the financial and operational strategies for each segment, and have tried to make the best assumptions given the data in the case. We also calculated the WACC for the Marriot Corporation as 9.04% based on the weighted average of the assets of each of the 3 segments. The symbols and formulas are consistent with the ones discussed in class.
Analysis of Parameters and Associated Assumptions
Tax Calculations (T)
Income Tax returns vary with different components of spending. The percentage is nearly fixed but fluctuate about a mean depending on various modes of income and expenditure. We used data from 1978 to 1987 in Exhibit1 of the case to calculate the effective tax rate in each year and took an average. Assumption: The effective tax rate for corporates has not undergone major changes in this period and the approximate components for tax are the same as before. Risk Free Rate (Rf), Credit Spread (CS) and Cost of Debt (Rd) We assumed that the useful life for the assets in each of the business segments are different and used data from Table B of the case to calculate the Rf for each of the business segments. The credit spreads were given to us in Table A of the case and depended on the A-Rating of Marriot’s unsecured debt. By adding CS and Rf we could calculate Rd for each business segment. Assumption: The best approximations for the Rf of the lodging business would be the 30-Year US Govt. Interest Rates due to longevity of the assets, for the...