valuations of their strategies. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been asked to calculate the weighted average cost of capital (WACC) for the company as a whole, as well as each of its three divisions as part of the annual budgeting process. Cost of Capital, WACC, CAPM Cost of capital is the rate of return that the firm must earn on investment so that the market value of the company’s equity share does not fall. The correct discount rate depends
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1) The four components of Marriott’s financial strategy are to manage rather than own hotel assets, to invest in projects that increase shareholder value, to optimize the use of debt in the capital structure, and to repurchase undervalued shares when necessary. Marriott’s growth objective is to become the preferred employer and provider in lodging, contract services (such as catering), and restaurants, and to be the most profitable company in their industry. By choosing to manage hotel properties
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1) What is the WACC for Marriott Corporation? What type of investments would you value using Marriott’s WACC? (Note: the WACC formula is on page 398 of the textbook. You might want to answer these questions on your way to WACC: a. What risk-free rate and risk premium did you use to calculate the cost of equity? The risk free rate used was a weighted average of the short-term treasury bills and long-term bond rates found in Exhibit 4. Using a weighted average based off the amount of revenue
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On average, this translates to $2100 per aircraft. Blended Winglet Project Expected Rate of Return Our calculations indicate that the IRR for this project, for any of our anticipated fuel costs, will be significantly higher than the long-term WACC of 11.291% (see part 3, below). However, this calculation could be inaccurate due to the long-term nature of the project and the assumptions inherent in the IRR. The IRR calculation assumes that we will be able to continuously reinvest our earnings
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cost of capital. What is WACC? and why is it important to estimate a firm’s cost of capital? The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. Thus, it is also known as an opportunity cost. Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC. What is WACC? and why is it important
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its estimate of its cost of capital? Does this make sense? ...... 3 3. What is the weighted average cost of capital for Marriott Corporation? ..................... 4 4. What type of investments would you value using Marriott’s WACC? ........................ 6 5. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7 6. What is the cost
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FI516 A. Here are the basic Definitions that relate to capital structure: V= Value of Firm WACC=Weighted average Cost of Capital FCF= Free Cash Flow rs And rd = Costs of stock and debt wce And wd = percentages of the firm that are financed with stock and debt Impact of capital structure is based upon the value of the effect that the debt have on the Weighted Average Cost of Capital and/or the Free Cash Flow. The debt holders, compared to the stockholders, have prior claim on cash flow
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Question 6 What is the cost of capital for the lodging and restaurant divisions of Marriott? Answer: The cost of capital for lodging is 9.2% and the cost of capital for restaurants is 13.1% Calculation: WACC = (1-t) * rd * (D/V) + re* (E/V) Where: D= market value of DEBT E = market value of EQUITY rd = pretax cost of debt re = aftertax cost of equity V = D+E t = tax rate To calculate the formula above, we need to determine each component Tax rate (t) 56% --> calculated before LODGING
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Method utilizes the net present value of future free cash flow projections and discounts the cash flow at a discount rate which was calculated using two of three options. In turn, this was done using the Weighted Average Cost of Capital (WACC). The motive for using WACC to get the discount rate is to attain excellent results. WACC’s utilization is viewed as a more ideal structure when the values attained reflects more than the Current Cost of Investment. The sum total of all the discounted cash flows
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Corporate Finance ADM 3350 M & P (Winter 2015) Assignment 1 Due Date: February 23, 2015 Question 1 (5 Marks) Varta Inc. has just issued a dividend of $1.50 per share on its common stock. The company paid dividends of $1.10, $1.15, $1.25, and $1.37 per share in the last four years. The stock currently sells for $48. a. What is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? b. What if you use the geometric average growth rate? Solution:
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