Solution to Case 04 Determining the Cost of Capital Can One Size Fit All? Questions: 1. Why do you think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain. Larry wants to estimate the firm’s hurdle rate because it would provide him with a yardstick with which to measure the feasibility of future investment proposals. The firm had thus far been using a ‘gut feel’ approach
Premium Weighted average cost of capital
1) Why do you think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain. Larry Stone wants to calculate the firm’s hurdle rate because he wants to have a more reliable basis of information before accepting projects for the company. By determining the firm’s hurdle rate‚ their company will also be able to make prudent decisions using accurate data. He also thinks that they should
Premium Weighted average cost of capital Finance Interest
Marriott Corporation: The Cost of Capital April 2012 Executive Summary Determining the appropriate cost of capital for new investment projects for a diversified company like the Marriott Corporation is not an easy endeavor. However‚ it is an important exercise because the more effective the process‚ the better it can help to support the company’s growth objective with its financial strategy. The four components of the financial strategy are: manage rather than own hotel
Premium Investment Finance Weighted average cost of capital
minimizing costs‚ and gaining and effectively using financial leverage to grow its business‚ while also aligning its goals and value-driven strategies to maximize share holder wealth‚ and achieve its short- and long-term objectives through delivering the value and services that the marketplace requires. The following discussion presents an in-depth analysis of Marriott’s financial position (through 1987) according to the Harvard Business Review Case‚ Marriott Corporation: The Cost of Capital (9-298-101)
Premium Weighted average cost of capital Internal rate of return Net present value
Marriot Case Marriot use the Weighted Average Cost of Capital to estimate the cost of capital for the corporation as a whole and for each division‚ and the hurdle rate is updated annually.(WACC = (1-Tc) * (D/A) * R[D] + (E/A) * R[E]) Marriot’s Tax Bracket = 175.9/398.9 = 44% Division’s asset weight to the corporation: Lodging = 2777.4/4582.7 = 0.59 Contract = 1237.7/4582.7 = 0.28 Restaurant = 567.6/4582.7 = 0.13 Risk free rate is 30 years T-Bond = 8.95% (Lodging use long-term debt)
Premium Weighted average cost of capital Economics Finance
used to calculate the present value of future cash flows: the cost of equity (Ke)‚ the weighted-average cost of capital (WACC)‚ and the unlevered cost of capital (Ku). The Cost of Common Equity The cost of common equity is the building block for all of the other discount rates. The cost of common equity is based on the expectations that Starbucks’ investors have about the return they want for their common stock investment. The cost of common equity is used in the dividend discount model and the
Premium Discounted cash flow Weighted average cost of capital Cash flow
experienced sharp increases in both sales and earnings. Because of this recent growth‚ Kaka‚ the company`s treasurer‚ wants to make sure that available funds are being used to their fullest. Management policy is to maintain the current capital structure proportions of 30% long-term debt‚ 10% preferred stock‚ and 60% common stock equity for at least the next 3 years. The firm is in the 40% tax bracket. Ace`s division and product managers have presented
Premium Finance Stock Weighted average cost of capital
single firm-wide discount rate because the operations of the three divisions differ drastically. However‚ the company has to ensure that the company uses an appropriate discount rate for each division. Therefore‚ we calculate the appropriate cost of capital for Marriott as well as for each of the three divisions. A detailed analysis is presented about the appropriate calculation inputs for each of the three divisions and various assumptions‚ made while performing the calculations‚ are justified.
Premium Net present value Investment Weighted average cost of capital
perspective of a premier growth company‚ this strategy might not be in line with objective. A premier growth company would concentrate on any and all NPV + projects‚ regardless of the impact on share holder value. 3. Optimize the use of debt in the capital structure • Marriott used target interest coverage ratios instead of D\E ratio signaling that their main priority was the ability to service its debt. With this cap on interest financing‚ Marriot effectively put a upper limit on their sustainable
Premium Finance Weighted average cost of capital Investment
Contents 1.0 Introduction 1 2.0 Executive Summary 1 3.0 Capital Structure 2 3.1 Types of Funding Utilised by Billabong 3 3.2 Recent trend in the level of leverage 3 3.3 Capital expenditure and financing: 5 3.4 Capital Structure of Similar Firms 6 3.5 Company Characteristics and Leverage policy 7 3.5.1 Taxes 8 3.5.2 Trade off Model 8 3.5.3 Pecking Order of Financing Choices 9 3.5.4 Signalling Theory 9 3.6 Optimal Capital Structure 10 4.0 Dividend Policy 10 4.1 Billabong dividend
Premium Corporate finance Dividend Capital structure