Marriott
WACC calculation:
1) Lodaging:
For Risk free rate, we use the 30-year U.S. government interest rate to match the duration of lodge. rf = 8.95%
For the expected return of the market portfolio, we use the average of S&P 500 index returns from 1926 – 87 as the proxy. rm = 12.01%
Therefore, the Market Risk Premium,
MRP = rm - rf = 12.01% - 8.95% = 3.06%
The debt rate spread of lodging = 1.10% βD = spread of lodging / MRP = 1.1 / 3.06 = 0.3595 rD = rf + MRP * βD = 8.95% + 3.06% * 0.3595 = 10.05%
We calculated the weigth average of the βu of different pure plays in the hotel industry and got βu = 0.4113(details in Excel file)
The assumption during the calculation of βu is that all the debts are risk free and there are no taxes for these hotels to simplify the calculation. In reality, it is impossible to have no taxes, but the case did not provide the relevant information and we can get an approximate result without big errors due to the feature of fraction number. Therefore, we used βu = βE * E/V to deleverage the financial risk for each of the hotels and compute the weight average of the βu for the hotel business by the revenue of each hotel. The details are in the attached excel file. βu of lodging division of Marriott = βu of pure play in the hotel industry
Then, we can calculate the βE of lodging divison at Marriot by releverage the βu of pure play.
The βE of lodging divison at Marriot, βE = βu + [βu – βD] * (D/E) * (1-T)
Among them, βu = 0.4113, βD = 0.3595. Since D/V for lodging = 74% (Table A in Page 4), E/V = 1- D/V = 26% and D/E = 74 / 26 = 2.846. We calculate the tax rate (T) by the historic data from 1978 to 1987 in exhibit 1. T = Income tax / EBIT = 32% and the details are in the excel file attached.
Plug in the number, we got βE = 0.4113 + (0.4113 -0.3595) * 2.846 * (1-0.32) = 0.5115.
Therefore,
rE = rf + MRP * βE = 8.95% + 3.06% * 0.5115 = 10.515%
By now, we can compute the WACC of lodging division in Marriott.
WACC = rD
1) Lodaging:
For Risk free rate, we use the 30-year U.S. government interest rate to match the duration of lodge. rf = 8.95%
For the expected return of the market portfolio, we use the average of S&P 500 index returns from 1926 – 87 as the proxy. rm = 12.01%
Therefore, the Market Risk Premium,
MRP = rm - rf = 12.01% - 8.95% = 3.06%
The debt rate spread of lodging = 1.10% βD = spread of lodging / MRP = 1.1 / 3.06 = 0.3595 rD = rf + MRP * βD = 8.95% + 3.06% * 0.3595 = 10.05%
We calculated the weigth average of the βu of different pure plays in the hotel industry and got βu = 0.4113(details in Excel file)
The assumption during the calculation of βu is that all the debts are risk free and there are no taxes for these hotels to simplify the calculation. In reality, it is impossible to have no taxes, but the case did not provide the relevant information and we can get an approximate result without big errors due to the feature of fraction number. Therefore, we used βu = βE * E/V to deleverage the financial risk for each of the hotels and compute the weight average of the βu for the hotel business by the revenue of each hotel. The details are in the attached excel file. βu of lodging division of Marriott = βu of pure play in the hotel industry
Then, we can calculate the βE of lodging divison at Marriot by releverage the βu of pure play.
The βE of lodging divison at Marriot, βE = βu + [βu – βD] * (D/E) * (1-T)
Among them, βu = 0.4113, βD = 0.3595. Since D/V for lodging = 74% (Table A in Page 4), E/V = 1- D/V = 26% and D/E = 74 / 26 = 2.846. We calculate the tax rate (T) by the historic data from 1978 to 1987 in exhibit 1. T = Income tax / EBIT = 32% and the details are in the excel file attached.
Plug in the number, we got βE = 0.4113 + (0.4113 -0.3595) * 2.846 * (1-0.32) = 0.5115.
Therefore,
rE = rf + MRP * βE = 8.95% + 3.06% * 0.5115 = 10.515%
By now, we can compute the WACC of lodging division in Marriott.
WACC = rD