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COST OF CAPITAL
Unlevering the beta removes any beneficial effects gained by adding debt to the firm's capital
structure. Comparing companies' unlevered betas gives an investor a better idea of how much risk he
is taking on when he purchases the stock. In finance, beta is the slope of the coefficient for a stock
regressed against a market index. Unlevered beta removes the impact of debt or leverage on the
regression.
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COST OF CAPITAL OF MARRIOTT CORPORATION
Kd = Rf + Debt Premium
Kd = 8.95 + 1.30 = 10.25%
Kd = Rf + Debt Premium
Kd = 8.95 + 1.10 = 10.05%
WACC = 0.26*19.89+0.74*10.05*(1-0.44)
= 5.17 + 4.16
WACC Lodging = 9.34 %
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COST OF CAPITAL OF MARRIOTT CORPORATION
Kd = Rf + Debt Premium
Kd = 8.95 + 1.80 = 10.75%
= 9.715 + 2.528
WACC Restaurants= 12.24 %
There is no company mentioned in case other than Marriott which provides contract services.
Therefore to find beta of contract services I have considered the company as a portfolio of three
divisions. The asset beta of the whole company is weighted average of the asset betas of the divisions.
Weights should be the fraction of total equity value in each division.
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COST OF CAPITAL OF MARRIOTT CORPORATION
𝟎. 𝟓𝟕 = 𝟎. 𝟐𝟑 + 𝟎. 𝟏𝟐𝟒 + 𝟎. 𝟐𝟕𝒙
𝟎. 𝟐𝟕𝒙 = 𝟎. 𝟐𝟏𝟔
𝟎. 𝟐𝟏𝟔
𝒙=
𝟎. 𝟐𝟕
𝒙 = 𝜷𝑪𝒐𝒏𝒕𝒓𝒂𝒄𝒕 𝑺𝒆𝒓𝒗𝒊𝒄𝒆𝒔 = 𝟎. 𝟖
Kd = Rf + Debt Premium
Kd = 8.95 + 1.40 = 10.35%
WACC = 0.60*18.86+0.40*10.35*(1-0.44)
WACC = 11.32 + 2.32
FINAL RESULTS
S.No Description WACC (%)
1 Marriot 11.27
2 Lodging 9.34
3 Restaurants 12.24
4 Contract Services 13.64
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