Question 6 What is the cost of capital for the lodging and restaurant divisions of Marriott? Answer: The cost of capital for lodging is 9.2% and the cost of capital for restaurants is 13.1% Calculation: WACC = (1-t) * rd * (D/V) + re* (E/V) Where: D= market value of DEBT re = aftertax cost of equity E = market value of EQUITY V = D+E rd = pretax cost of debt t = tax rate To calculate the formula above‚ we need to determine each component Tax rate (t) 56% --> calculated before LODGING
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weighted average cost of capital (WACC)? What are some components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the effect on WACC when an organization raises long-term capital? a) Weight average cost of capital is calculated by averaging all of the capital costs acquired by an organization. b) Some components of WACC are several different types of capital which are stocks‚ bonds‚ and common equity. c) WACC is a more appropriate discount rate
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Answers to Warm-Up Exercises E9-1. Answer: Weighted average cost of capital N 10‚ PV $20‚000 (1 0.02) $19‚600‚ PMT Solve for I 8.30% 0.08 $20‚000 $1‚600‚ FV $20‚000 E9-2. Cost of preferred stock Answer: The cost of preferred stock is the ratio of the preferred stock dividend to the firm’s net proceeds from the sale of the preferred stock. rp Dp Np rp (0.15 $35) ($35 $3) rp $5.25 $32 16.4% E9-3. Cost of common stock equity Answer: The cost of common stock equity can be found by dividing the dividend
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mustneed to analyse the WACC and we should select the category providing less WACC but thecategory must be at-least BBB.WACC is the minimum rate of return that a company must earn in order to stay in the break-even position. Return below the WACC will lead the company toward deficit‚ so everyorganization wants higher return thanitsWACC. Companies generate its funds from varioussources like: securities‚ debt‚ convertibles etc. and all these sources have certain weight.Therefore‚ WACC considers all the sources
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recommended to invest ● UBS Warburg/ CSFB recommended not to invest What is WACC? WACC methodology is used to discount future cash flows allowing us to use the information for present decisions that will benefit the company in the future. WACC is estimated using present and past information‚ therefore it varies depending on the information being used WACC set by investors and market ◦ Not by Managers The estimated WACC sets the least amount of returns that the investor needs in order to either
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result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L ’s IRR is 15%. The projects have the same NPV at the 8% current WACC. However‚ you believe that the economy is about to recover‚ and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased‚ and their cash flows will not be affected by the change
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hurdle-rate system. The tasks for the student are to resolve the debate‚ estimate weighted average costs of capital (WACCs) for the two business segments‚ and respond to the raider. Suggestions for complementary cases: “Nike Inc.” (case 13) gives an introductory exercise in the estimation of the cost of capital. “Coke vs. Pepsi‚ 2001” (case 14) offers the estimation of WACCs for two competitors and opportunities to reflect upon how business risk drives cost of capital. “Phon-Tech Corp.”
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could differ for each division. This is the most logical approach due to the fact that the projects related to a particular division should be evaluated using the division’s WACC rather than the corporation’s WACC. 3) What is the Weighted Average Cost of Capital for Marriott Corporation? In order to calculate the WACC for Marriott’s Corporation I’m going to use the following formulas: 1. Weighted Average Cost of Capital: 2. Levered Beta: Marriott’s structure: D= 60%
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scenario. There is a scenario in which the WACC changes independently off all other variables to about 22%. In this situation‚ the build option would provide an NPV of around $17‚000. That NPV while positive is nowhere near what Tremont would like out of their investment. The base IRR for the build option is low because it generates most of its value in the later years of the project. This makes it more sensitive to changes in the discount rate. The WACC can go as low as 25% below the base value
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ROC | 9.10% | 11.0% | Book Value | $11.4 Billion | $4.6 Billion | Market Value | 75% | 25% | Growth | Revenue grew 3% in last 4 years | Sales grew 40% last year | The approach to a long-term solution for Teletech Corporation required a new WACC calculation of each business segment and a final determination when it comes to using the current hurdle rate or a risk-adjusted hurdle rate. Also a review of Teletech’s value creation formula of economic profit used to make strategic decision about
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