marriott case - dakota christensen

8/13/2019 Marriott Case - Dakota Christensen

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WACC - Marriott

Givens: Company as a whole

Target Debt Ratio (D/V) 60% Maturity Rate

Target Debt to Equity Ratio (D/E) 1.5 30-year 8.95%

Debt Rate Prem above Gov't 1.30% 10-year 8.72%

Tax Rate (t) (See Tax Rate Calculation) 44.8% 1-year 6.90%

Calculation of Cost of Debt (Rd):

Rd = Debt rate prem above Gov't + 10-year gov't interest rateRd 10.02%

WACC = (D/V)*(1-t)*Rd+(E/V)*Re

Calculation of Cost of Equity (Re):

WACC 10.62%

Capm = Rf + B(expected levered)*(equity premium)

Rf = 10-year gov't interest rate 8.72%

B(levered) 0.97

Equity Premium** 7.43%

Actual D/V (given in case) 41.00%

Actual D/E 69.49%

Calc to Unlever Beta and Relever Beta

Step 1. Unlever Beta

Bu 0.701

Step 2. Relever Beta using Target D/E

Bl 1.28

Now Calc Capm

Capm 18.24%

3. Estimate the asset bta for Marriott as a whole.

Bu = asset beta

Asset Beta 0.701

**From the case - The arithmetic average from 1926-1987 of the spread between S&P 500 Composite Returns andLong-Term US Government Bond Returns

Appendix

2. Estimate the cost of capital (rwacc) for Marriott as a whole.

US Gov't Interest Rates

Since Lodging using the long-term debt and restuarants and contract services use the short-

term debt, I am going to use the 10-year gov't interest rate to calculate the cost of debt

(Rd).

Marriott uses the Capm model to calculate cost of equity.

Calcuation of WACC:


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Marriott - Restaurants WACC Table

Use Comparable Data

Equity Beta Actual D/V Assumed Tax Rate Actual D/E Unlevered Beta

0.75 4% 44.8% 4.2% 0.7331

0.6 10% 44.8% 11.1% 0.5653

0.13 6% 44.8% 6.4% 0.12560.64 1% 44.8% 1.0% 0.6364

1 23% 44.8% 29.9% 0.8584

1.08 21% 44.8% 26.6% 0.9417

Average Bu 0.6434

Target D/V (Restaurants): 42%

Target D/E (Restaurants): 72%

Take Average Bu and Relever using Target Ratios

Bl 0.900817995

Calc Capm

Rf=1-year gov't rate 6.90%

Equity Premium 8.47%

Capm 14.53%

Calc Rd

Premium 1.80%

1 year rate 6.90%

Rd 8.70%

Calculate WACC

WACC 10.45%

McDonald's

Wendy's International

4. Estimate the cost of capital for the restaurant division using a bottom up approach.

Church's Fried Chicken

Collins Foods International

Frisch's RestaurantsLuby's Cafeterias


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Marriott - Contract WACC Table

Target D/V (Contract) 40%

Target D/E (Contract) 67%

Be (Marriott) 0.97

Tax Rate (t) 44.8%

Target D/V (Marriott) 41.0%

Target D/E (Marriott) 69.5%

Weight for Lodging (wl)** 61%

Weight for Restaurant (wr)** 15%

Weight for Contract (wc)** 25%

Unlever Beta for Marriott as a whole

Bu 0.700913989

Bu(Marriott) = wl*bul+wr*bur+wc*buc

.70091 = 61%*.4803+15%*.6434+25%*Buc

25%*Buc = 0.316584928

Buc = 1.27050715

Relever Unlevered Beta for Contract and Find WACC

Bl 1.738436625

Calc Capm

Rf=1-year gov't rate 6.90%

Equity Premium 8.47%

Capm 21.62%

Calc Rd

Premium 1.40%

1 year rate 6.90%

Rd 8.30%

Calculate WACC

WACC 14.81%

Division 1985 1986 1987 Average

Lodging 2,108.90$ 2,236.70$ 2,777.40$ 2,374.33$ 61%

Restaurant 582.60$ 562.30$ 567.60$ 570.83$ 15%

Contract 624.40$ 1,070.20$ 1,237.70$ 977.43$ 25%

Total 3,922.60$ 100%

Division Unlevered Beta

Lodging (Bul) 0.4803

Restaurant (Bur) 0.6434

Contract (Buc) 1.2705

5. What is the cost of capital for Marriott's contract services division?

% of Average Total

Ratio of Idenfiable Assets (Past 3 Years)


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Tax Table

Marriott

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Taxes 35.4 43.8 40.6 45.2 50.2 76.7 100.8 128.3 168.5 175.9

EBT 83.5 105.6 103.5 121.3 133.7 185.1 236.1 295.7 360.2 398.9

Tax % 42.4% 41.5% 39.2% 37.3% 37.5% 41.4% 42.7% 43.4% 46.8% 44.1%

Tax Average from 1978 to 1987: 41.6%

Tax Average (Last 3 years): 44.8%

**Last three years seems closer to what the future may hold for tax rates

Answers Table

Question Answer

1 In the paper

2 10.62%

3 0.7009

4 (lodging) 8.82%

4 (restaurants) 10.45%5 14.81%

marriott case - dakota christensen

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