Marriott Corporation: The Cost of Capital

Asset beta for Lodging

Market Value of Leveraged Unleveraged -

Leverage Equity Beta Asset Beta
Hilton Hotels 0.14 0.76 0.69
Holiday Corporatio 0.79 1.25 0.38
La Quinta Motor In 0.69 0.89 0.38
Ramada Inns, Inc 0.65 1.36 0.64
Average 0.53
Weighted
Average (by
Sales) Asset
beta 0.51

Asset Betas for Restaurants

C's Fried Chicken 0.04 1.45 1.41
Collins Foods Inter 0.1 1.45 1.36
Frisch's Restauran 0.06 0.57 0.55
Luby's Cafeterias 0.01 0.76 0.76
McDonald's 0.23 0.94 0.80
Wendy's Internatio 0.21 1.32 1.14
Average 1.00
Weighted
Average (by
Sales) Asset
beta 0.92
 Unleveraged
Adjusted Equity Adjusted Asset
Beta Beta 1987 Revenues
0.84 0.76 0.77
1.17 0.36 1.66
0.93 0.40 0.17
1.24 0.59 0.75
0.53

0.50

1.30 1.27 0.39

1.30 1.22 0.57
0.71 0.69 0.14
0.84 0.83 0.23
0.96 0.81 4.89
1.21 1.05 1.05
0.98

0.90
Marriott Corporation: The Cost of Capital

WACC for Marriott Corporation

Unlever the Beta

Levered Equity beta 1.11
Actual Debt / Value ratio 41.22%
Unlevered Asset beta 0.78

Lever the Asset beta

Unlevered Asset beta 0.78
Target Debt / Value ratio 60%
Levered Equity beta 1.48

Equity Cost of Capital

Risk free rate - Yield on 30-years US T-bonds 8.95%
Average Market Risk Premium (1926-1987) 7.43%
Levered Equity beta 1.48
Cost of Equity using CAPM 19.98%

Cost of Debt
Risk free rate - Yield on 30-years US T-bonds 8.95%
Credit spread - Premium for Credit Risk 1.30%
10.25%

WACC 11.68%
Marriott Corporation: The Cost of Capital

WACC for Lodging Division

Lever the Asset beta

Unlevered Asset beta 0.53
Target Debt / Value ratio 74%
Levered Equity beta 1.42

Equity Cost of Capital

Risk free rate - Yield on 30-years US T-bonds 8.95%
Average Market Risk Premium (1926-1987) 7.43%
Levered Equity beta 1.42
Cost of Equity using CAPM 19.51%

Cost of Debt
Risk free rate - Yield on 30-years US T-bonds 8.95%
Credit spread - Premium for Credit Risk 1.10%
10.05%

WACC 9.54%
Marriott Corporation: The Cost of Capital

WACC for Restaurant Division

Lever the Asset beta

Unlevered Asset beta 1.00
Target Debt / Value ratio 42%
Levered Equity beta 1.44

Equity Cost of Capital

Risk free rate - Yield on 10-years US T-bonds 8.72%
Average Market Risk Premium (1926-1987) 7.43%
Levered Equity beta 1.44
Cost of Equity using CAPM 19.40%

Cost of Debt
Risk free rate - Yield on 10-years US T-bonds 8.72%
Credit spread - Premium for Credit Risk 1.80%
10.52%

WACC 13.90%
Marriott Corporation: The Cost of Capital

WACC for Contract Services Division

Asset beta - Marriott Corporation 0.78

Asset beta - Lodging Division 0.53
Asset beta - Restaurant Division 1.00
Asset beta - Contract Services division 1.11

Identifiable Assets as a proxy for Market Value

Lodging Division 909.7 0.52
Restaurant Division 373.3 0.22
Contract Services division 452.2 0.26
1735.2

Lever the Asset beta

Unlevered Asset beta 1.11
Target Debt / Value ratio 40%
Levered Equity beta 1.56

Equity Cost of Capital

Risk free rate - Yield on 10-years US T-bonds 8.72%
Average Market Risk Premium (1926-1987) 7.43%
Levered Equity beta 1.56
Cost of Equity using CAPM 20.31%

Cost of Debt
Risk free rate - Yield on 10-years US T-bonds 8.72%
Credit spread - Premium for Credit Risk 1.40%
10.12%

WACC 14.62%
Marriott Corporation: The Cost of Capital

Marriott Corp. Lodging Division Restaurant Divison

Unlevered Asset beta 0.78 0.53 1.00
Debt / Value ratio 60% 74% 42%
Levered Equity beta 1.48 1.42 1.44
Required rate of return on
debt 10.25% 10.05% 10.52%
Cost of Equity 19.98% 19.51% 19.40%
WACC 11.68% 9.54% 13.90%
Contract Services
1.11
0.40
1.56

10.12%
20.31%
14.62%
Amazon, Inc. $1.25 billion Convertible Bonds Issue in 1999

Coupon 4.75%
Credit Rating CCC+
Par Value 1000
Issued at discount 980

Interest Rate on
Plain Vanila Debt
for comparable
credit rating firm 11% Debt Component $626.55
Cash Flows Equity Component $353.45
1/1/1999 -980
6/30/1999 23.75
12/31/1999 23.75
6/30/2000 23.75
12/31/2000 23.75
6/30/2001 23.75
12/31/2001 23.75
6/30/2002 23.75
12/31/2002 23.75
6/30/2003 23.75
12/31/2003 23.75
6/30/2004 23.75
12/31/2004 23.75
6/30/2005 23.75
12/31/2005 23.75
6/30/2006 23.75
12/31/2006 23.75
6/30/2007 23.75
12/31/2007 23.75
6/30/2008 23.75
12/31/2008 1023.75