Turkish Banks 2009

Table of Content {text:bookmark-start} Key assumptions {text:bookmark-end} In practise beta of debt is often assumed to be zero since debt is a security with fixed payments and therefore less sensitive to market movements. However we will consider both solutions, throughout question 1, 4 and 5 the WACC is calculated for the case were beta of debt is zero and for the case were beta of debt is not equal to zero. The latter is in Marriott’s case more appropriate since the firm’s cost of debt is higher than the risk free rate. The next paragraph gives a summary of general assumptions made during the calculations of Marriott’s WACC. The other assumptions will be pointed out when they are applied in the relevant questions. 2).The weighted average of each business line is based on its sales contribution to Marriott’s total sales. The weighted average of lodging is 41%, that of contract services is 46% and that of restaurants is 13%. 3).The risk free rate is calculated as a weighted average of the 30- and 10 year U.S.Government Interest Rates from April 1988 (8.8143%). 4). A market risk premium of (12.01%-8.8143%) is used to calculate both the cost of equity and the cost of debt of the overall firm. The average of the S&P 500 index is 12.01% for the period 1926-1987. We assume that this is the best predictor for the future market returns. 6). Corporate tax rate is the same for all divisions and equal to 45%. 7). The following assumptions are made for beta debt is considered to be zero and not equal to zero, Constant leverage ratio Rebalancing leverage ratio frequently and the following assumption is made for beta of debt is equal to zero. The company doesn’t pay a spread above the risk free rate {text:bookmark-start} Question 1 {text:bookmark-end} What is the firm’s overall weighted average cost of capital? Can you use Marriott’s equity beta as shown in Exhibit 3? {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Beta of...