The lodging division’s WACC was 10.24%, the restaurant division’s WACC was 10.68%, and the contract services division WACC was 7.55%. MARRIOTT CORPORATION WEIGHTED AVERAGE COST OF CAPITAL (WACC) In order to determine the WACC for the entire firm we computed Marriott’s cost of debt before
MARRIOTT CORPORATION: THE COST OF CAPITAL Lodging Division Cost of Debt From Table A, * Fraction of Debt at Floating: 50% * Fraction of Debt at Fixed: 50% Using credit risk premium to calculate cost of debt, the equation is as follows: Cost of Debt = Low risk rate+Risk premium Floating Rate -- Assume the interest rate of floating rate debt changes every year so we use 1-year rate U.S. Government interest rate, which is 6.90% (from Table B). Therefore, the cost of floating rate debt equals 6.9% plus the 1.1% risk premium, which totaled to 8%. Fixed Rate -- As lodging assets have long useful lives, we use the long-term debt rate, i.e. 30-year U.S. Government interest rate, which is 8.95% (from Table B). Therefore, the cost of fixed rate debt equals 8.95% plus 1.1% risk premium, which totaled to 10.5% Cost of Debt = (0.5 x 0.08) + (0.5 x 0.105) = 0.095 = 9.25% [since floating rate and fixed rate debt both weigh 50%, we use the weighted average approach to calculate the total cost of debt rate] Based on historical data analysis below, we get an average income tax rate of 42%.
Normal Cost of Trade Credit = [Discount percentage/(100-Discount percentage)]*[365days/(credit outstanding-Discount Period)] Normal Cost of trade credit = (3/97)*(365/30) = 37.63% Question 6. Your supplier offers terms of 1/10, Net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45? Normal Cost of Trade Credit = [Discount percentage/(100-Discount percentage)]*[365days/(credit outstanding-Discount Period)] Normal Cost of trade credit = (1/99)*(365/45) = 8.19% Question 10. The Manana Corporation had sales of $60 million this year.
* $18 M purchase price * $1.8 M selling price * Investment in PPE (2007) was $16 M * Investment in PPE (2008) was $2 M * $4 M in Sales (2008) * $10 M in Sales (2009-2013) * COGS: 75% of Sales * SG&A: 5% of Sales * $2 M Operating Savings (2008) * $3.5 M Operating Savings (2009-2013) * Depreciation was on a straight-line basis for 6 years beginning in 2008 * $18 M / 6 years = $3 M * 40% tax rate * NWC: 10% of Sales * Salvage value was zero * The FCF per year was determined using the following: * Net Income + Depreciation Expense - ∆ Net Working Capital + Investment in PPE After generating the FCF for each year, I had to solve for NPV and IRR to value the investment. I calculated 2 NPVs—one using Excel’s NPV equation and the other by discounting each year’s FCF using the WACC I calculated earlier. Both methods gave me negative NPVs. * Excel NPV: ($489,344.33) * Discounted FCF NPV: ($538,153.89) Lastly, I used Excel to
For federal taxation purposes, the proceeds received by the investor company in a proportionate redemption are taxed as dividends by applying the effective intercorporate dividend tax rate. In 1983, that tax rate was approximately 6.9 percent. Berkshire also chose to treat the proceeds from the redemption of the GEICO stock as dividend income in its 1983 financial statements. Berkshire’s audit firm, Marwick, Mitchell & Company, approved that accounting treatment. In 1984, another company in which Berkshire had a significant equity
Assume commercial use is at the March level. Also assume that the Sales Promotion and Corporate Services expenses will be at the same levels as in March. Salem Data Services Contribution Margin Income Statement For the Quarter Ended March 31, 2004 Revenues Intracompany $ 82,000 Commercial 110,400 Total Revenues: $ 192,400 Less: Variable Expenses Power (at $4.70) $ 1,612 Operations: Hourly Personnel (at $24.00) 8,232 Total Variable Expenses: $ 9,844 Contribution Margin $ 182,556 Less: Fixed Expenses Rent $ 8,000 Custodial Services 1,240 Computer Leases 95,000 Maintenance 5,400 Depreciation 26,180 Operations: Salaried Staff 21,600 Systems Development & Maintenance 12,000 Administration 9,000 Sales 11,200 Sales Promotion 8,083 Corporate Services 15,236 Total Fixed Costs: $ 212,939 Net Income $ (30,383) 4. Assuming the intracompany demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to
FM421 – Applied Corporate Finance Case Study: Tottenham Hotspur plc 25th January 2013 201128545 201125438 201121479 201119785 201130179 201129057 1) Valuation based on Discounted Cash Flow In order to perform a DCF approach we first calculated the WACC and then the FCF. WACC WACC= rd(1-t)*[D/(D+E)] + re*[E/(D+E)] t = 35% (from the case, exhibit 1) rd= rf= 4.57% (exhibit 1, assuming β of debt = 0) Net Debt/EV=0.11 (EV = Market Value of Equity + Net Debt) re= rf+βe*(rm-rf)= 4.57%+ 1.29*5%=11.02 (under CAPM assumptions) [E/(D+E)]= 1-0.12=0.88 WACC= (0.0457)*(1-0.35)*0.11 + (0.1102)*0.89= 10.12% Free Cash Flow FCF= EBIT(1-t) – CAPEX – ΔNWC + Depreciation As EBIT and tax rate are given we have to calculate the ΔNWC. ΔNWC=Inventory + A/R – A/P As accounts receivable and payable are sensitive to sales changes, we assume that A/P and A/R change but their ratio to sales remains constant over time. We assume the same for the ratio of inventory/merchandise sales. (A/P)/Sales= 19.99/74.1 = 0.26977058 (A/R)/Sales= 64.4/74.1 = 0.869095816 Inventory/Merchandise sales= 1.17/5.2=0.225 We then multiplied the ratios for the equivalent factors (sales and merchandise sales) on the pro-forma balance sheet for the years between 2008 and 2020 and found the ΔNWC for every year.
| Marriott Corporation:The Cost of Capital | Case Analysis | | | GROUP ONE, LLC 123 Woodward, Detroit, MI, Ph: (313) 570-1000 April 5, 1988 Mr. Dan Cohrs Vice President of Project Finance Marriott Corporation 10400 Fernwood Road Bethesda, MD 20817 Dear Mr. Cohrs, Thank you for selecting Group One, LLC. We have reviewed Marriott’s financial information provided; the company’s planned financial strategy, current market conditions, and overall and financial information on comparable competitors. Based on the information gathered and reviewed we have prepared discount rates for Marriott’s three divisions: Lodging, Contract Services and Restaurants. In addition, per MC’s request Group One has reviewed whether divisional discount rates should be used to determine incentive compensation. Briefly, it is Group One’s recommendation that Marriott use divisional discount rates based on each division’s industry to discount future project cash flows.
1. The corporate tax rate Tax rate = Income taxes = 175.9 = 44% (from Exhibit 1) Income before income taxes 398.9 2. The debt ratio for each division (from Table A) 1) Hotels (Lodging): debt ratio=74% 2) Restaurants: debt ratio=42% 3) Contract Services: debt ratio=40% 3. The cost of debt for each division rD= government bond rate + credit spread (from Table A & Table B) 1) Hotels (Lodging): rD= 8.95%+1.1%=10.05% (long term Gvnt bond rate) 2) Restaurants: rD= 6.9%+1.8%=8.7% (short term Gvnt bond rate) 3) Contract Services: rD= 6.9%+1.4%=8.3% (short term Gvnt bond rate) 4. The cost of equity for each division (book value of debt)* A. Unlevered beta for Hotels (from Exhibit 3) | Market leverage (D/V) | Equity beta(βc) | Tax rate | Unlevered beta=βc/[1+(1-T)D/E] | Hilton | 14% | 0.88 | 44% | 0.81 | Holiday | 79% | 1.46 | 44% | 0.47 | La Quinta | 69% | 0.38 | 44% | 0.17 | Ramada | 65% | 0.95 | 44% | 0.47 | Average | | | | 0.48 | Unlevered beta for Restaurants | Market leverage (D/V) | Equity beta(βc) | Tax rate | Unlevered beta=βc/[1+(1-T)D/E] | Church’s | 4% | 0.75 | 44% | 0.73 | Collins | 10% | 0.6 | 44% | 0.57 | Frisch’s | 6% | 0.13 | 44% | 0.13 | Luby’s | 1% | 0.64 | 44% | 0.64 | McDonald’s | 23% | 1 | 44% | 0.86 | Wendy’s | 21% | 1.08 | 44% | 0.94 | Average | | | | 0.65 | Unlevered beta for Marriott Corporation: | Market leverage (D/V) | Equity beta(βc) | Tax rate | Unlevered beta=βc/[1+(1-T)D/E] | | 41% | 0.97 | 44% | 0.7 | Unlevered beta for Contract Services: (from Exhibit 2) | Identifiable assets (1987) | percentage | Hotels (Lodging) | 2777.4m | 61% | Restaurants | 567.6m | 12% | Contract Services | 1237.7m | 27% | Total | 4582.7m | | 61%×0.48+12%×0.65+27%×βu(c)
COMPANY PROFILE 2. COMPANY FINANCIAL III. PESTEL analysis (500wd) 1. Political 2. Economic 3.1 contribution of Marriott to UK GDP 3.2 Contribution of Marriott to employment in the areas 3.