Essay About Market Risk Premium And Corporate Tax Rate

Finance Cheat Sheet
Finance Cheat Sheet
MARRIOTT CASE STUDYLodging, Contract Services and Restaurants are the three different business units, where potential projects could be undertaken. To understand the various risks within each of the business units, Marriott should study the separate WACCs of each division, in addition to calculating the WACC for the entire organization. Based on the information provided within the case, Marriott uses WACC as a way of measuring the opportunity cost of capital for investments:WACC = [pic 1] = 60%, based on Table A[pic 2]Corporate tax rate, given by Exhibit 1 (Income taxes divided by Income before Income Taxes) = 44%, as in 1987.Calculate   using the CAPM model.  + Beta (market risk premium)[pic 3][pic 4]The calculations yield the following WACC calculations on a per department basis:Unlevered BetaD/VE/VDebt rate premium over govtrd (govt rate + risk premium)ReWACCMarriott1.1160%40%1.30%10.25%12.9%8.62%Lodging1.0974%26%1.10%10.05%12.8%7.49%Contract Services1.1140%60%1.40%8.30%12.9%9.62%Restaurants1.0842%58%1.80%8.70%12.7%9.41%Marriott as a whole has a WACC of 8.62%. Contracting services seems to have the highest WACC, indicating that Marriott should be careful in taking projects within that area, since the WACC is quite high. Lodging would be the best place to venture, since it would not take too much to cross the lower WACC of 7.49%. It is important to note that leverage would change the beta that has been shown above as the average. If leverage beta is included in this study, the calculations would change in the following manner: Unlevered BetaLevered BetaD/VE/Vrd (govt rate + risk premium)ReRe (levered Beta)WACCRecalculated WACC with levered BetaMarriott1.112.0460%40%10.25%12.9%20.8%8.62%11.78%Lodging1.092.8374%26%10.05%12.8%27.5%7.49%11.31%Contract Services1.111.5240%60%8.30%12.9%16.5%9.62%11.73%Restaurants1.081.5242%58%8.70%12.7%16.4%9.41%11.56%Interesting to note that including the ‘levered Beta’ in the calculation for WACC yields significantly higher and closer WACCs within all the business units. Marriott should consider projects in all areas when thinking of investing, as all the three WACCs are relatively high. Lodging provides the lowest WACC, which may be a good place to start with project investment.