Marriott
Marriott Corporation: The Cost of Capital
T c=income taxes of 1987 / income before income taxes of 1987 = 175.9/398.9 = 44%
Step 1:From the Exhibit 3 ß equity for each firm in this industry are below
Marriot Corporation 1.11; Hilton Hotels Corporation .76 ; Holiday Corporation 1.35
La Quinta Motor Inns .89; Ramada Inns, Inc 1.36.
Step 2: For each firm in the industry, to estimate bunlevered using the bequity estimate: bequity = [1 + (1-TC)Debt/Equity]bunlevered bunlevered of Marriot= 1.11/[1+(1-.44)*.41]=.90 bunlevered of Hilton= 0.76/[1+(1-.44)*.14]=.70 bunlevered of Holiday= 1.35/[1+(1-.44)*.79]=.94 bunlevered of La Quinta= 0.89/[1+(1-.44)*.69]=.64 bunlevered of Ramada= 1.36/[1+(1-.44)*.65]=.997
Step 3: Take an industry average of the bunlevered estimates as estimate of firms bunlevered (.90 +.70+.94+.64+.997)/5 = .84
Step 4: Use firm’s target D/E ratio and bunlevered estimate to calculate bequity bequity = [1 + (1-TC)Debt/Equity]bunlevered bequity = [1 + (1-.44)*.41]*.84= 1.03
Step 5: Calculate the R equity using CAPM
The risk free rate was 4.58%, and the equity risk premium was 7.43% for average from 1926-87
R equity =r f + ß(r premium) = 4.58%+1.03*7.43%= 12.23%
Step 6: Calculate [Debt/(Debt + Equity)] and [Equity/(Debt + Equity)]
V=D+E D/V=.41 E/V=1-D/V=1-.41= .59
Step 7:Use formula above to calculate r WACC r debt= r f + r debt premium = 8.72%+1.10% = 9.82%
WACC=rdebt*(1-Tc)(D/V)+requity*(E/V)=9.82%*(1-0.44)*.41+12.23%*0.59 = 9.47%
Case: The Harvard Management Co. and Inflation-Protected Bonds (HBS Case 201053).
The purpose of a case is to challenge you to identify the key issues of the decision situation at hand. Here are a few pointers:
1. How do regular (nominal) Treasury bonds work? How does inflation impact coupons and principal of T-bonds? How are TIPS different from regular T-bonds? When do TIPS outperform regular Treasuries?
2. What effect do you think an increase in real interest rates has on the
T c=income taxes of 1987 / income before income taxes of 1987 = 175.9/398.9 = 44%
Step 1:From the Exhibit 3 ß equity for each firm in this industry are below
Marriot Corporation 1.11; Hilton Hotels Corporation .76 ; Holiday Corporation 1.35
La Quinta Motor Inns .89; Ramada Inns, Inc 1.36.
Step 2: For each firm in the industry, to estimate bunlevered using the bequity estimate: bequity = [1 + (1-TC)Debt/Equity]bunlevered bunlevered of Marriot= 1.11/[1+(1-.44)*.41]=.90 bunlevered of Hilton= 0.76/[1+(1-.44)*.14]=.70 bunlevered of Holiday= 1.35/[1+(1-.44)*.79]=.94 bunlevered of La Quinta= 0.89/[1+(1-.44)*.69]=.64 bunlevered of Ramada= 1.36/[1+(1-.44)*.65]=.997
Step 3: Take an industry average of the bunlevered estimates as estimate of firms bunlevered (.90 +.70+.94+.64+.997)/5 = .84
Step 4: Use firm’s target D/E ratio and bunlevered estimate to calculate bequity bequity = [1 + (1-TC)Debt/Equity]bunlevered bequity = [1 + (1-.44)*.41]*.84= 1.03
Step 5: Calculate the R equity using CAPM
The risk free rate was 4.58%, and the equity risk premium was 7.43% for average from 1926-87
R equity =r f + ß(r premium) = 4.58%+1.03*7.43%= 12.23%
Step 6: Calculate [Debt/(Debt + Equity)] and [Equity/(Debt + Equity)]
V=D+E D/V=.41 E/V=1-D/V=1-.41= .59
Step 7:Use formula above to calculate r WACC r debt= r f + r debt premium = 8.72%+1.10% = 9.82%
WACC=rdebt*(1-Tc)(D/V)+requity*(E/V)=9.82%*(1-0.44)*.41+12.23%*0.59 = 9.47%
Case: The Harvard Management Co. and Inflation-Protected Bonds (HBS Case 201053).
The purpose of a case is to challenge you to identify the key issues of the decision situation at hand. Here are a few pointers:
1. How do regular (nominal) Treasury bonds work? How does inflation impact coupons and principal of T-bonds? How are TIPS different from regular T-bonds? When do TIPS outperform regular Treasuries?
2. What effect do you think an increase in real interest rates has on the