HOSPITALITY FINANCIAL ANALYSIS

CAPITAL STRUCTURE THEME

Final Exam Guideline

1. Date : July 22, 2022

2. Format : Computer-based (Just use the computer to type your answer, no Excel
calculations), written, please bring the calculator. No other materials are allowed.
For the capital structure theme questions, they are close-book.
3. Answer : Will be posted on TEAMS right after the exam.
4. 1 Calculation question+1 Interpretation question
5. Weight : 20% of the course grade
6. For the calculation question: You will be given the necessary information to calculate
the weighted average cost of capital (WACC). Please review “Demo_Cost of
capital” file and its answer key on TEAMS. You will find a similar type of
question.
7. For the interpretation question: Based on the Marriott capital structure decision case
you studied and presented in class, you will be asked to interpret one question from
the case chapter material.
 Here is the questions pool:

I- “Could you please explain what happens if Marriott's capital structure

changes?”

 RELATION BETWEEN COST OF EQUITY AND COST OF DEBT

Dette et capital se calculent séparément – le wacc est la combinaison des deux côuts
pondérés à leur poids dans le capital :
WACC = coût de la dette X poids de la dette + coût du capital x par le coûts du
capital
Par conséquent, si Marriott change sa structure de capital (c’est le poids de la dette
et du capital qui change) le wacc changera.
WACC = c’est la rentabilité attendue par des investisseurs : banque et actionnaires –
plus le WACC est important plus la rentabilité attendue est importante plus le risque
est fort.
Coût dette = intérêts
Plus le poids de la dette augmente plus le coûts de la dette est important et plus le
risque d’insolvabilité est élevé.
Plus le poids des capitaux propres est important plus le risque de dilution est
important c’est-à-dire que le résultat par action diminue, moins l’action est attractivité
BUT parvenir un équilibre poids dettes / poids capitaux propres  lorsque Marriott
change structure qu’elle ait un bon équilibre entre les deux éléments pour bénéficier
d’un effet de levier grâce à la dette.
Quand on augmente le coût de la dette, le coût de l’equity (capitaux propres)
augmente car ce sont les actionnaires qui portent ce risque  ils doivent recevoir
plus que les banques pour combler la part de risque  Prouvé par Modigliani et
Miller

II- “Could you please explain how the capital structure impacts Marriott stock
price?”

Augmentation Augmentation du Augmentation du Augmentation du

de la dette coût de la dette coût du capital risque

Le prix de l’action Résultat par action

augmente puis augmente
diminue et price
u
earning ratio Résultat diminue
diminue moins vite que le
(action/earning per nombre d’actions
share diminue
III- “Could you please explain how Marriott set capital structure in practice?”

a- Theories abordées par Marriott selon le DAF

b- Ce que Marriott a mis en place : financials rules

Dept should be maintained between 40% and 45% dept range. Being in this range of debts
will allow the firm to maximize its value while getting the lowest WACC.
Moody’s commercial paper rating should be at P-1 or better. Because Marriott was in
expansion and started building new hotels, the firms needed to borrow a lot of money. Being
 well graded proves that Marriot have the ability to repay its obligations which gave them the
guarantee that public capital markets accept to provide bonds.
The principal source of financing should be domestic, unsecured, long-term, fixed-rate
bonds. Issuing this kind of debt is in adequation with Marriott new business model. Indeed, by
using a light asset strategy Marriott had to issue debts to finance the hotels and then sold the
properties. Even if unsecured debts are more expansive, they allowed the firms to make those
debts long term to maintain its debts range. In addition, Mr Wilson anticipated an inflation in
the next years which would have increased the interests. To avoid that, fixed rate bonds was
the best solution but to do that, the firm had to use the public market.
No new convertible debt or straight preferred stock should be issued. Even if convertible
debts are generally cheaper, Marriott would have got no benefits using it because it has an
image of a stable company making its equity future value not interesting for the market. The
choice of stopping issuing straight preferred stock comes from the fact that the dividend paid
to holders are not taxable and fixed which is even worse than a debt. Marriott just had no
reason to issue them.
Paying cash dividend instead of stock dividend. Stock dividends were taxed at lower rate
and can forge stronger links with the investors. The reason of this choice is probably that the
firm had excess cash flow which will be presented in the next part.

IV- “Could you please explain the sustainable growth strategy of Marriott?”

Barely 2 years after the decision to establish a 45% limit on senior debt and capital lease obligations,
Marriott decides to issue $235 million in debt and buy back 10 million shares.

Why did it violate the guidelines in such a short time? Marriott believes that it is now generating
excess cash and if it does not change its policies, it believes its debt ratio will decrease. This is a
consequence of a change in the sustainable growth rate of Marriott.

How is this possible? Primarily because Marriot has sold assets. This change in strategy led Marriott
to generate more sales per dollar of assets, increasing the sales/asset ratio from 1.05 in 1976 to 1.51 in
1979. It should also be noted that in addition to changing its business strategy, Marriott has withdrawn
from unprofitable activities, thereby increasing profits/assets. Thus, the profitability ratio also
increased from 3.5% in 1976 to 4.7% in 1979.

Obviously, this change in strategy has also had an impact on Marriott's ROE. While ROA (Net
Income/Assets) increased from 3.7% to 6.6% in just 3 years, leverage decreased from 2.9 to 2.4 over
the same period. This demonstrates that Marriott has become more profitable and less capital intensive
than it was at the time the guidelines were adopted. Thus, if nothing changes and Marriott continues to
generate excess cash, leverage will fall.
 V- “Could you please explain if Marriott has excess cash, what to do with the
excess cash?”

1. Pay down debt (financial market solution)

2. Pay a higher dividend (financial market solution)

3. Invest more in current business (product market solution)

4. Acquire other firms (product market solution)

5. Buyback stock (financial market solution)

The question then becomes: what should Marriott do with the excess cash from the five possibilities?
A reminder of Marriott's new strategy: to issue $235 million in debt and buy back 10 million shares.
We automatically understand that Marriott has chosen the 5th possibility, but why this one and not the
others?

Paying down debt: not in Marriott's interest because, according to the company, a “high portions of
debt reduce the weighted cost of capital and real returns”, because as we know, debt is cheaper than
equity.

Pay a higher dividend: not in Marriott's interest because its largest shareholder is the Marriott family.

Invest more in current business: not in Marriott's interest because, according to the company, “Since
Marriott already was growing its business rapidly, further acceleration could outpace the company’s
ability to develop sufficient operating management.”

Acquire other firms: not in Marriott’s interest, mainly because to diversify is to face with new
management limitations and high acquisition prices, which goes against the company's strategy of “an
aggressive hotel expansion program”, by developing hotel properties and selling them to outside
investors while continuing to operate them.

Buyback stock: this only makes sense if the company’s shares are undervalued; an undervalued share
is a share whose price is lower than its real or "fair" value. In this case, share buybacks can produce
high financial returns, which is why, “after a thorough study of the company’s business prospects and
projected cash flows, management concluded that the shares were undervalued.”.
CALCUL DU WACC

Davis Hotel Company

During the last few years, Davis Hotel Company has been too constrained by the high cost of
capital to make many capital investments. Recently, though, capital costs have been
declining, and the company has decided to look seriously at a major expansion program that
had been proposed by the marketing department. Leigh Jones, the financial vice president
has asked you to estimate Davis’ cost of capital and has provided you with the following data
which she believes will be relevant to your task. The firm’s tax rate is 40%.

The current price of Davis’ noncallable bonds is $1,153.72 and there are 500,000 bonds
outstanding. These bonds carry a 12% annual coupon rate, paid semiannually. They will
mature in 15 years. The current price of the preferred stock is $113.10, with a par value of
$100 and the company has 885,000 shares outstanding. The preferred stock is 10%
dividend and is paid quarterly. Davis has 26.5 million shares outstanding and the stock is
currently selling at $50 per share. Last years dividend was $4.19 and dividends are
expected to grow at a constant rate of 5%. The stock’s beta is 1.2. The yield on a treasury
bill is currently 5% and the market risk premium is expected to be 9%.

Finally, the target capital structure is 30% long term debt, 10% preferred stock, and 60%
common equity. What is Davis’ current weighted average cost of capital?

Au cours des dernières années, la société Davis Hotel Company a été trop limitée par le coût
élevé du capital pour réaliser de nombreux investissements. Récemment, cependant, le
coût du capital a diminué et l'entreprise a décidé d'examiner sérieusement un important
programme d'expansion qui avait été proposé par le département marketing. Leigh Jones, la
vice-présidente financière, vous a demandé d'estimer le coût du capital de Davis et vous a
fourni les données suivantes qui, selon elle, seront utiles à votre tâche. Le taux d'imposition
de l'entreprise est de 40 %.

Le prix actuel des obligations non remboursables de Davis est de 1 153,72 $ et il y a 500
000 obligations en circulation. Ces obligations ont un taux d'intérêt nominal annuel de 12 %,
payé semestriellement. Elles viendront à échéance dans 15 ans. Le prix actuel des actions
privilégiées est de 113,10 $, leur valeur nominale est de 100 $ et la société a 885 000
actions en circulation. L'action privilégiée a un dividende de 10% et est payée
trimestriellement. Davis a 26,5 millions d'actions en circulation et l'action se vend
actuellement à 50 $. Le dividende de l'année dernière était de 4,19 $ et il est prévu que les
dividendes augmentent à un taux constant de 5 %.

Le bêta de l'action est de 1,2. Le rendement d'un bon du Trésor est actuellement de 5 % et
la prime de risque du marché devrait être de 9 %.
*Une obligation non remboursable est une obligation qui n'est remboursée qu'à l'échéance.
L'émetteur d'une obligation non rachetable ne peut pas racheter l'obligation avant sa date
d'échéance.

** La valeur future de l'obligation à l'échéance est sa valeur nominale de 1000 $ par

obligation. Le paiement du coupon est basé sur la valeur nominale.

CORRECTION PROF

Debt (bonds)

1153.72*500000=576.86 million$

Common stock

50*26500000=1325 million$

Preferred stock

113.10*885000=100.0935 million$

Total market value = 576.86+1325+100.0935=2001.9535 million$

Weight of debt=576.86/2001.9535=28.82%

Weight of common stock=1325/2001.9535=66.18%

Weight of preferred stock = 100.0935/2001.9535=5.00%

Cost of debt

Present value =-1153.72$

Future value = 1000.00$

15 years*2=30 times for coupon payment

For each time, pmt=1000*12%/2=60$

I/Y=5%

YTM=5%*2=10%=cost of debt (before tax)

After tax cost of debt = 10%*(1-40%)=6%

Cost of preferred stock=$10/113.10=8.84% (DDM model)

Cost of common stock

CAPM model

Rs=5%+1.2*9%=15.80%

DDM model

Rs=(D1/P0)+g=(4.4/50)+5%=13.80%

D1=D0*(1+g)=4.19*(1+5%)=4.4$

Rwacc=6%*28.82%+8.84%*5%+15.80%*66.18%=12.63%

Rwacc=6%*28.82%+8.84%*5%+13.80%*66.18%=11.30%
Plan.

1. Calcule des valeurs : Dept, common stocks, preferred stocks 

2. Calcule du capital (sommes des valeurs)

3. Calcule du poids des composantes en %

4. Calcul du coûts des composantes en %

5. Calcule avec la formule finale

MODÈLE DU CALCUL

WACC = Cout de la dette * poids de la dette + cout des actions priviligiées * poids AP +
couts des actions common * poids des AC

I – Calcul des poids des composants

A- Montant des composants

1)Debt = Nombre d’obligations * prix actuel des obligations non remboursables (valeur
actuelle)

2) Common stock = Nombre d'actions (common) en circulation * le prix de vente actuel des
actions (common)

3) Preferred stock = Nombre d’actions privilégiées en circulation* le prix de vente actuelle

des actions privilégiées

B- Montant de ton capital

4)Xx + xx + xx = Total market value

C- Poids de tes composants

- Valeur Dettes / montant total du capital * 100

- Valeur Capitaux propres privilégiés / montant total du capital * 100
- Valeur Capitaux propres communs / montant total du capital * 100

II- Calcul des couts des composants

A- cout de la dette

Méthode Sans excel

= Taux d’intérêt * (1-taux d’imposition)

Méthode Avec Excel

Prix actuels des obligations non remboursables*(-1)
Valeur future : La valeur future de l'obligation à l'échéance est sa valeur nominale de xx $ par obligation

Date d’échéance x (la fréquence de versement) ex  si c’est semestriel alors multilplier par 2, si c’est mensuel multiplier 12…) = le
nombre de fois qu’un coupon sera payé

- Utiliser la fonction taux

Etape 1- [Nombre de période de remboursement (date d’échéance * la fréquence de

versement)] ; [montant du paiement pour chaque période] ; [valeur actuelle (prix actuel des
obligations non remboursables (valeur actuelle)) ; [valeur future de l’obligation] = Y

[montant du paiement pour chaque période] = la valeur future* taux d'intérêt nominal annuel /
la fréquence de versement

Etape 2 - YTM (taux actuariel) = Y * 2 (fréquence de versement)

on veut connaitre le taux d’intérêt annuel donc multiplier par la fréquence de paiement = YTM taux actuariel =
coût de la dette avant les taxes

Etape 3 : coût de la dette avant taxe*(1- Le taux d'imposition de l'entreprise) = coût de la
dette après taxes

Present value = Le prix actuel des obligations non remboursables

Future value = La valeur future de l'obligation

Number of period = faire le calculi pour avoir Sur une année !!!!

B - Cout des preferred stock

Preferred cost  = dividende* / Valeur actuel actions priviligié * 100. (selon DDM model)

*dividende = valeur nominale actions priviligié * taux de dividende

C- Cout des common stock

CAPM model

Le rendement d'un bon du Trésor + (Le bêta de l'action* la prime de risque du marché)

DDM model

D1=D0*(1+g)

D1= dividende de l'année dernière *(1+taux d’actualisation des dividendes %)

Cout de l’equity = (D1/P0)+g

Cost of equity =(D1/prix actuel de l’action)+ taux d’actualisation des dividendes

Pour la formule finale

 Si les nombres sont en décimal alors je multiplie par 100 a la fin

 SI les nombres sont en pourcentages alors je divise par 100 à la fin