1. Calculate marriort ‘s current unlevered beta using dollar values from the financial statement.

Answer:
Levered Equity beta 1.11
Value of long term debt $2,499
Value of Equity $3,564
Total $6,063
Debt to total value 41%
Target debt ratio 60%
Since we need the levered equity beta for 60% debt ratio, the equity levered beta for a debt. Ratio of
41% should be unlevered and levered back at 60% debt.
Levered Equity Beta 1.11
Actual Debt Ratio 41%
Unlevered Asset Beta 0.76
Tax Rate 34%

2. Marriot is projecting their future percentage of debt in their capital structure will increase to
about 60%. When this happens to Marriot show what Marriot’s levered beta will be.
Answer: when debt target is 60% then levered beta us 1.51

Unlevered asset beta 0.76

Target debt ratio 0.6
Levered equity beta 1.51

3. List the pure play

Answer: these are following because in the lodging these segments are working.
Hilton Hotels
Holiday Corp.
La Quinta Motor Inns.
Ramada Inns.

4. What are the Unlevered betas of each Pure Play firm that you have just selected.
Answer: following are the unlevered betas for the Pure Play firms.
Unlevered
Asset beta

Hilton Hotels 0.65

Holiday Corp. 0.30
La Quinta Motor
Inns. 0.28
Ramada Inns. 0.49

5. What is the average unlevered beta of these pure play firms betas.
Answer: the average of unlevered beta is following: we sum all pure plays division unlevered betas and
divide by the total number of division with 4.
Average Unlevered
beta 0.43
Formula of leveraged beta
ΒL = βU[ 1 + (1-t)(D/E)]
We are supposed to select levered Beta by selecting the unlevered beta because company has changed the
debt portion. Whenever company changes the portion of debt and equity we first identify unlevered beta
by considering debt “zero”. We have selected levered beta 1.21 because of calculating the cost of capital.
Levered Beta

Unlevered asset beta 0.42

Target debt ratio (Table A) 74%
Levered Equity beta 1.21

6. What is the cost of equity in 1998?

Answer: The cost of equity in 1998 is following. We have calculated the cost t of equity by the formula
following:
Cost of equity: Risk free rate + Asset beta multiply with market risk premium. Risk free rate is bonds yield
which is 8.95% and beta is 1.21 we have calculated above. And risk premium is 7.43% which is market risk
premium minus risk free rate. After cost of equity is 17.95%
Cost f equity

Riskless rate 8.95%

Levered Equity beta 1.21
Risk Premium 7.43%
Cost of Equity 17.95%

7. what is the cost of debt for lodging?

Answer: The cost of debt for the lodging is following. We have calculated the cost of lodging as long-term
American treasury bonds which YTM is 8.95% plus 1.1% as long term rate.
Cost of debt
Cost of long term Bonds 8.95%
Debt of lodging over and
above 1.10%
Long term rate
Cost of debt 10.05%

8. What is the cost of capital?

Answer: As we have calculated the cost of equity and cost of debt above. Here we consider the tax rate 35%
and portion of the debt is .74 and equity .26 following. We put values in formulas and we get calculation. As
9.58%
 Cost Weights
Equity 17.95% 0.26
Debt 10.05% 0.74
Tax rate 0.34
WACC 9.58%

9. List the pure play you have selected in order to determine the beta of the restaurants division?
Answer:
Church's Fried
Chicken
Collins Foods
Frisch's
Luby's
McDonald's
Wendy

10. What are the Unlevered betas of each Pure Play firm that you have just selected.
Answer: following are the unlevered betas for the Pure Play firms.

Unlevered
Asset beta
Church's Fried Chicken 1.392
Collins Foods 1.305
Frisch's 0.5358
Luby's 0.7524
McDonald's 0.7238
Wendy 1.0428

11. What is the average unlevered beta of these pure play firms betas.
Answer: the average of unlevered beta is following: we sum all pure plays division unlevered betas and
divide by the total number of division with 6.
Average Unlevered
Asset beta 0.96

12. What is the cost of equity in 1998?

Answer: The cost of equity in 1998 is following. We have calculated the cost t of equity by the formula
following:
Cost of equity: Risk free rate + Asset beta multiply with market risk premium. Risk free rate is bonds yield
which is 8.72% and beta is 1.42 we have calculated above. And risk premium is 7.43% which is market risk
premium minus risk free rate. After cost of equity is 19.26%
Riskless rate 8.72%
Beta 1.42
Risk premium 7.43%
Cost of Equity 19.26%

13. what is the cost of debt for restaurants?

Cost of 10 year bonds 8.72%
Cost of debt over and
above 1.8%
bonds
Cost of debt over and
above 10.52%

The cost of debt for the restaurants is following. We have calculated the cost of restaurants as long-term
American treasury bonds which YTM is 8.72% plus 1.8% as long term rate.

14. What is the cost of capital?

Answer: the cost of capital is 14.09% .
Cost Weights

Equity 19.26% 58.00%

Debt 10.52% 42.00%
Tax rate 34.00%
WACC 14.09%

15. What is the service division beta? Also show the weights.
Answer: Here we calculated the betas of all three division the provide the weights according to the case. These
weights are .62 for lodging and .28 catering service and .1 for rwstaurants. Then we multiply these with bets
and get the service beta devision. following

Division Identifiable Weights Asset

Assets beta
(million of
$)

Lodging 2777.4 0.62 0.42

Catering services 1237.7 0.28
Restaurants 467.6 0.10 0.96
Marriott as a whole 0.65
4482.7

Asset beta of
Contract services 1.049003