Marriott Corporation

BUSINESS FINANCE II: ASSIGNMENT 1

Ahmed Gul
Meshal Sajjad
Shah Taha Hasan
Aisha Khalid
Syed Hussain Qumber Rizvi
 Solution: Marriott Corporation
Beta:

1. Unlevered Beta is first calculated from the conversion formula, using arithmetic average of tax
rates of 1986 & 1987. For D/E value, geometric mean of 1986 & 1987 is used because the values
are not independent of each other. Since 1986 & 1987 daily values were used for calculation of
beta value, tax rate and D/E calculations were based on these two recent years only
2. Levered beta is then again calculated for the new target value of D/E ratio, using the average tax
rate of the past 5 years, because it is impossible to predict the next year's tax rate without any
further information
3. Through the conversion formula, beta has been adjusted to accomodate for changes in tax rate
and D/E Ratio, but has not still accomodated for the multiple business lines. Since there is no
sufficient data given, and the fact that the WACC is to be calculated for the company as a whole,
it is safe to ignore the adjustment due to multiple business lines"

D/E Ratio:

 A target value of 60% is used , as mentioned in the case

Interest Rate:

 Although the unsecured debts were of Class A (see Moody's Table) and considered to be short
term, it is mentioned in the case that assets pertaining to Lodging are to be considered as long
term. Restaurants and Contracting Services are considered to be short term. By nature,
restaurant assets are more of a short term nature as compared to contract services, and hence
the values

Cost of Debt:

 6 years average for weightage clculation has been used, so that the extra premium of interest
could be assigned at a pro-rata business

Risk Free Rate:

 Since the risk free return is haighly variable (as in the table in case study), it is better to consider
only those years for which the default beta value was calculated, i.e 1986 & 1987

Mean:

 The expected market returns in subsequent years are not independent of each other, and so are
to be calculated using the geometric mean, instead of the arithmetic mean