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%.
If she were to move to another state where her marginal state rate would be 10 percent, would her choice be any different? Assume that Dana itemizes deductions. When the state rate is 5 percent, Dana would achieve the following returns from the Treasury bond or the corporate bond: The Treasury bond yields $1,125 or $30,000 x [.05 x (1-.25)] after tax. The corporate bond yields $1,282.50 or $30,000 x [.06 x (1 - .25 - .05(1-.25))] after tax. Note that the actual state rate is reduced by 25% to allow for the deductibility of state income taxes on the federal income tax return.
They then develop target leverage ratios and use the WACC to determine the cost of capital for the whole corporation as well as each of the three divisions. 1. What is the weighted average cost of capital (WACC) for Marriott Corporation (2 points)? 2 Cost of Debt = risk free weight + debt rate premium above gov’t = 8.95% + 1.30% = 10.25% Levered Beta βE = βU * [1 + (1-tax rate)(target leverage / (1 - target leverage))] = 0.80 * [1 + (1-0.44)(0.60 / (1 – 0.60))] = 1.472 Cost of Equity = risk-free rate + βE(risk premium) = 0.0895 + 1.472(.0743) = 0.2079 rME = 8.95% + 1.472 * 7.43% = 19.89% WACC = (1-T) * pretax cost
You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5 pts) b. What is the after-tax cost of debt if the tax rate is 34%?
They expect that the extra tables will add between $2,000 and $5,000 to the restaurant’s monthly revenue. The bank is willing to let the business have an intermediate-term loan of $50,000 for five years, at an interest rate of 6.5 percent. Calculate the monthly payment, and explain whether taking this loan is a smart business decision.
What amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants? (Points : 4) $28,800 $33,600 $41,600 $40,000 3. (TCO A) On January 1, 2010, Trent Company granted Dick Williams, an employee, an option to buy 100 shares of Trent Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $900. Williams exercised his option on September 1, 2010, and sold his 100 shares on December 1, 2010.
What is the expected dividend yield and expected capital gains yield? Explain the difference in the required return estimates from the ValueLine (see question 1a) to the WSJ price data. The company’s return on common stock using the constant growth model is 7.72%. The expected dividend yield is [pic]. The expected capital gains yield is the difference of the total yield, 7.72%, and the dividend yield of 2.22%, which give us 5.5% for the
The parent receives annual dividends from the subsidiary of $2,500,000. If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received? Question 20 New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market.
Project out 5 full years (1996-2000) and then project 2001 as the stable terminal year. Use the DCF to value the entire firm, and then find per-share value as you did in the DCF homework: (PV of FFCF + cash - LT debt)/# of shares. Use the following inputs: (a) number of shares = 18,272,741, (b) incremental NWC as % of incremental Sales = 7% (i.e., the cash flow associated with NWC in year 1996 is 7% of the
1995 Contract Negotiations Parameter | Expected | Offered | Remarks | Peak Period Rooms | 875 | 775 | Easy to let at full price. | Off Period Rooms | 150 | 150 | | Mid Period Rooms | 850 | 805 | Could be possible if date list modified. | Room Rate | $50 Per Night | $58 Per Night | Plus 12% Occupancy Tax | Breakfast Price | $ 7 | $8 | All taxes and gratuities. | Complimentary Rooms | | 1 For every 20 rooms | | Complimentary Hospitality Suite | | | 1:20 Complimentary Breakfasts | 3. Off Period Off Period | | Principal Objective: Improve Occupancy Rate | | | 2 pts per room as long as Room Rate exceeded min levels | | | | | | | | | | Min Level | $39 | | | | | | | Rate > $49 | 1 Bonus Point | | | | | | | | | | | | | | | Pick Up Rate | 100% | | | | | | | | | | | | | | | No Of Rooms : | 150 | | | | | | | Rate | $58 | | | | | | | No Of Points | 450 | | | | | | | | | | | | | | 4.