Marriott
1. The choice of comparable companies for lodging division and restaurant division has been taken from Exhibit-3 based on the following reasons:
a. Companies operating the same businesses.
b. For Lodging Division – Hilton Hotels, Holiday Corporation, La Quinta Motor Inns, Ramada Inns
c. For Restaurants Division – Church’s Fried Chicken, Collins Foods International, Frisch’s Restaurants, McDonald’s and Wendy’s International
d. Luby’s Cafeterias was not considered as a comparable because the business is not exactly the same as restaurants.
The assets betas for each comparable company have been calculated by un-levering their equity betas based on their respective leverage ratios given in Exhibit 3. Refer to Annexure – A & B (Attached) for Asset Beta and Equity Beta calculations for Lodging and Restaurant Services respectively. The Equity Beta for each division has been calculated based on their respective target leverage ratios given in Table – A of the case.
Since there are no comparable companies for Contract Services division, the asset beta has been calculated based on the assets ratios of the three divisions. The asset beta values for Lodging and Restaurant Services, as calculated in Annexure – A & B and the asset beta for Marriott Corporation as a whole, has been used to calculate the asset beta for Contract Services and its equity beta was calculated using the target leverage ratio given in Table – A of the case. Refer to Annexure – C for calculations.
The Risk free rates were taken as the U.S Government interest rates as on April 1988, given in Table B of the case. Risk Free Rate for Lodging Division has been considered as 8.95 % since those assets have long useful life. For Restaurant and Contract Services divisions, the risk free rate has been taken as 8.72 % since these assets have shorter useful lives.
Market Risk Premium has been taken as 7.43% (from Exhibit – 5), as it...
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