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Marmot’s current financial strategy Is In line with Its overall goal of steady growth. By building and then promptly selling their hotels to limited partners, the company recoups its costs almost immediately. They then run the hotels, taking a 20% cut of the profits in addition to a 3% management fee. This results in fast, stable returns, which is good for continued growth. They may run Into issues with overextension in the future, but for the time being, their strategy Is sound. The other elements of Amorist’s financial strategy are also In line with their overall goals.
By seeking projects that would increase shareholder value and repurchasing undervalued shares, they ensure that the value of their equity does not decrease. When coupled with the use of debt in the company’s capital structure, they are creating a good framework for future growth. Cost of Capital – Lodging and Restaurant Divisions We begin with an analysis of hurdle rates for the Lodging and Restaurant divisions, for which public comparable company figures are provided, to back Into cost of capital for Contract Services in the next section, for which public comparable are not available.
S Treasury interest rates: we used the 30-year for Lodging and the 10- year for Restaurant due to the longevity of the assets in each respective division. Lodging assets consist mostly of real estate and have lives spanning decades, while restaurants are more likely to have a life cycle closer to 10 years. The geometric average in 1987 for the spread between the S 500 and U. S. Government Bonds at 7. 92% is used as the market risk premium in all cases, and the cost of debt is calculated by adding the debt rate premium for each division to each division’s risk free rate.
A tax rate of 44. 1% is extrapolated by dividing income tax expense by BET in the historical financial. With the entire infrastructure in place, we can calculate each division’s cost of equity wrought the CAMP model: Cost of Capital – Contract Services Division Comparable companies are not given for the Contract Services Division, but information about the division can be backspaced using some simple algebra as we are given Amorist’s balance sheet breakdown by segment in Exhibit 2: Since it is given that Amorist’s unleavened beta is . 7, its tax rate is 44. 1%, and has 60% debt in its capital structure, we can unlived to see that Marriott as an entire firm has an unleavened beta of . 79. Assuming that Amorist’s unleavened beta can be calculated as a weighted average of its divisions’ betas based on identifiable assets, e can find Contract Services unleavened beta by solving: Using some algebra, this yields an unleavened beta of 1. 55 for Contract Services. Reliving with the 2/3 desired debt-to-equity ratio yields a levered beta of 2. 13.
This time, we use the I-day risk-free rate due to the even shorter lifespan of contracts. Cost of Capital – Marriott as a Whole There are several ways to approach Amorist’s cost of capital as an entire firm. One way is to use CAMP to find its cost of equity, long-term interest rates for the cost of debt, and weigh according to its capital structure to find WAC. Under this method, e lever the previously found firm-wide ;LLC of . 79 to the desired 3/2 debt-to-equity ratio to find a cost of equity of 17. 12%.