# Marriott Case Hbs

Topics: Modigliani-Miller theorem, Debt, Financial markets Pages: 3 (937 words) Published: January 22, 2012
Issue
In this assignment, we are asked to compute the WACC of Marriott Corporation and each of the company’s three divisions. Our approach is outlined in the next section. We made a series of assumptions regarding either the available data or the missing information. This has been explained below, in a separate section. Approach

We applied the following formulae to calculate the WACC:

Our assumptions are explained in the next section. The table below presents the approach for calculations at corporation level and division level according to each of the variables. Marriott’s capital structure comprises debt (fixed and floating) and equity.

1Beta of Debt (β¬¬d)Computed using correlation between S&P500 returns and HG Corp Bonds (recent history is implicitly more weighted), s.d. of the S&P500 and s.d. of the HG Corp Bonds (Exhibit 4)Same 2Risk-Free RateEstimated to be equal to 10y US Gov Interest Rate as of April 1988 (Table B)Same 3Current LeverageUsing financial statements (Exhibit 1), we estimated the market value of debt and divided by market value of assets. Market value of debt is estimated to be equal to its book value. Market value of assets is equal to market value of debt + market value of equity (number of outstanding shares * price per share)N/A 4Market Risk PremiumFrom table of returns (Exhibit 5), taken as the average of spread between rates of return for S&P500 and LT US Gov Bonds, 1926-87Same 5Tax RateEstimated from data in exhibit 1, from ratio between income before tax and net income for year 1987Same 6Beta of Equity (βE), Unlevered βE Levered can be found in Exhibit 3 for the current debt load. Using the current leverage ratio (Step 3), we calculate the unlevered βE.Having found unlevered equity betas of comparables from their leverage ratio and levered βE (Exhibit 3), we averaged the unlevered βE to get the unlevered βE for each Marriott division. Restaurants division was...

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