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Harvard Business School Case #298-101
Case Software #XLS096
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Table A Market Value-Target Leverage Ratios and Credit Spreads for Marriott and Its Divisions
Lodging 74 50 50 1.10
Contract services 40 40 60 1.40
Restaurants 42 25 75 1.80
Table B U.S. Government Interest Rates, April 1988
Maturity Rate
30-year 8.95%
10-year 8.72
1-year 6.90
Exhibit 1 Financial History, 1978-1987 (millions of dollars except per share data)
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Summary of Operations
Sales $1,174.1 $1,426.0 $1,633.9 $1,905.7 $2,458.9 $2,950.5 $3,524.9 $4,241.7 $5,266.5 $6,522.2
Earnings before interest expense and income taxes 107.1 133.5 150.3 173.3 205.5 247.9 297.7 371.3 420.5 489.4
Interest expense 23.7 27.8 46.8 52.0 71.8 62.8 61.6 75.6 60.3 90.5
Income before income taxes 83.5 105.6 103.5 121.3 133.7 185.1 236.1 295.7 360.2 398.9
Income taxes 35.4 43.8 40.6 45.2 50.2 76.7 100.8 128.3 168.5 175.9
Income from continuing operationsa 48.1 61.8 62.9 76.1 83.5 108.4 135.3 167.4 191.7 223.0
Net income 54.3 71.0 72.0 86.1 94.3 115.2 139.8 167.4 191.7 223.0
Funds from continuing operationsb 101.2 117.5 125.8 160.8 203.6 272.7 322.5 372.3 430.3 472.8
a
The company’s theme park operations were discontinued in 1984.
b
Funds provided from continuing operations consist of income from continuing operations plus depreciation, deferred income taxes, and other items not currently affecting working capital.
c
Total capital represents total assets less current liabilities.
Exhibit 2 Financial Summary by Business Segment, 1982-1987 (millions of dollars)
Lodging
Contract Services
Restaurants
0.27
0.12
Exhibit 3 Information on Comparable Hotel and Restaurant Companies
a
Calculated over period 1983-1987.
b
Estimated by ordinary least-squares regression using daily data over 1986-1987 period.
c
Book value of debt divided by the sum of the book value of debt plus the market value of equity.
Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987
Source: Casewriter’s estimates based on data from the University of Chicago’s Center for Research in Security Prices.
Unlevered Beta Estimation
Comparable Levered Beta D/V ratio D/E Ratio Unlevered Beta Revenues
Hilton Hotels Corporation 0.88 0.14 0.16 0.81 0.77
Holiday Corporation 1.46 0.79 3.76 0.47 1.66
La Quinta Motor Inns 0.38 0.69 2.23 0.17 0.17
Ramada Inns 0.95 0.65 1.86 0.46 0.75
Cost of Equity
Unlevered Beta 0.53
Target D/V Ratio 0.74
Target D/E Ratio 2.85
Levered Beta 1.38
Risk-free Rate 8.95%
Market Risk Premium 7.43%
Cost of Equity 19.20%
WACC
Pre-Tax Cost of Debt 10.05%
Cost of Equity 19.20%
Target D/V Ratio 0.74
Target E/V Ratio 0.26
WACC 9.18%
TAX RATE(Last 5 years) 43.7%
Levered Beta 0.97
Current D/V 0.41
Current D/E 0.694915
Tax Rate 0.437
nlevered Beta 0.7
rget D/V Ratio 0.6
rget D/E Ratio 1.5
evelered Beta 1.29
isk Free Rate 8.95%
MRP 7.43
Cost of Equity 18.51