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Find:

1. The overall company's WACC

2. Each Division's WACC

2 3 Hospitality Corp. is a holding company that owns two divisions: Hotel and Restaurants. In order to make value-enhancing investment decisions, The CEO is trying to determine the company's cost of capital, In this process, he has realized that it is critical to also calculate each division's hurdle rate (why?). Therefore, you are tasked with finding the following: 4 5 6 1. The overall company's WACC 2. Each Division's WACC 7 8 9 10 11 12 13 14 15 You also know the following information: a) Hospitality's Corp. equity beta is currently 1.5 b) Hospitality curently has a capital structure (D/V)=60%. However, its target capital structure is D/V=40%. At its target level of leverage, its cost of borrowing will be 13%. c) Hospitality's tax rate (as well as all of its divisions's) can be assumed at 25%. You can also assume this tax rate for all similar companies. od) While the corporation as a whole (as well as the hotel division) can be assumed to hold assets with average lives of 10 years, the restaurant's division's assets have shorter average lives. A good approximation is 5 years. e) Market data can be found in the tab titled "Market Data", tables 1 and 2. f) While the company's overall beta is known, the betas for each division are not. The CEO has collected market data from several regional hotel and restaurant companies that are perceived to be similar to the hotel and restaurant divisionss in the holding company. See the information provided in tab titled "Similar Company data", tables 3 and 4. O 16 17 18 19 20 D E F G H 1 J L 2 3 4 5 6 7 Table 1: Market Information Period YTM for 5-year government debt Now YTM for 10-year government debt Now Stock Market Return Now Stock Market Return Historical Average of last 30 year YTM for 5-year government debt Historical Average of last 5 years YTM for 5-year government debt Historical Average of last 30 year YTM for 10-year government debt Historical Average of last 5 years YTM for 10-year government debt Historical Average of last 30 year Rate 10.47% 12.50% 15% 32% 15.24% 17.40% 18.79% 21.82% 9 10 11 12 13 14 15 16 17 18 Table 2: Divisional Target Capital Structures and Cost of Borrowing Division Optimal Capital Structure (DV) Cost of Borrowing under Hotel Division 45% 14.32% Restaurant Division 30% 16.87% 19 20 21 1 2 3 4 5 6 7 8 9 10 11 12 Table 3. Equity Beta and Leverage for Hotel Similars Egyuty Beta D/V E/V Hotel 1 0.72 12% 88% Hotel 2 1.35 82% 18% Hotel 3 1.21 68% 32% Hotel 4 1.36 36% 64% 13 ble 4.Equity Beta and Leverage for Restaurant Simila Equity Beta D/V E/V Restaurant 1 0.62 4% 96% Restaurant 2 1.45 15% 85% Restaurant 3 0.57 6% 94% Restaurant 4 1.38 24% 14 15 16 76% 17 18 19 20 21 2 3 Hospitality Corp. is a holding company that owns two divisions: Hotel and Restaurants. In order to make value-enhancing investment decisions, The CEO is trying to determine the company's cost of capital, In this process, he has realized that it is critical to also calculate each division's hurdle rate (why?). Therefore, you are tasked with finding the following: 4 5 6 1. The overall company's WACC 2. Each Division's WACC 7 8 9 10 11 12 13 14 15 You also know the following information: a) Hospitality's Corp. equity beta is currently 1.5 b) Hospitality curently has a capital structure (D/V)=60%. However, its target capital structure is D/V=40%. At its target level of leverage, its cost of borrowing will be 13%. c) Hospitality's tax rate (as well as all of its divisions's) can be assumed at 25%. You can also assume this tax rate for all similar companies. od) While the corporation as a whole (as well as the hotel division) can be assumed to hold assets with average lives of 10 years, the restaurant's division's assets have shorter average lives. A good approximation is 5 years. e) Market data can be found in the tab titled "Market Data", tables 1 and 2. f) While the company's overall beta is known, the betas for each division are not. The CEO has collected market data from several regional hotel and restaurant companies that are perceived to be similar to the hotel and restaurant divisionss in the holding company. See the information provided in tab titled "Similar Company data", tables 3 and 4. O 16 17 18 19 20 D E F G H 1 J L 2 3 4 5 6 7 Table 1: Market Information Period YTM for 5-year government debt Now YTM for 10-year government debt Now Stock Market Return Now Stock Market Return Historical Average of last 30 year YTM for 5-year government debt Historical Average of last 5 years YTM for 5-year government debt Historical Average of last 30 year YTM for 10-year government debt Historical Average of last 5 years YTM for 10-year government debt Historical Average of last 30 year Rate 10.47% 12.50% 15% 32% 15.24% 17.40% 18.79% 21.82% 9 10 11 12 13 14 15 16 17 18 Table 2: Divisional Target Capital Structures and Cost of Borrowing Division Optimal Capital Structure (DV) Cost of Borrowing under Hotel Division 45% 14.32% Restaurant Division 30% 16.87% 19 20 21 1 2 3 4 5 6 7 8 9 10 11 12 Table 3. Equity Beta and Leverage for Hotel Similars Egyuty Beta D/V E/V Hotel 1 0.72 12% 88% Hotel 2 1.35 82% 18% Hotel 3 1.21 68% 32% Hotel 4 1.36 36% 64% 13 ble 4.Equity Beta and Leverage for Restaurant Simila Equity Beta D/V E/V Restaurant 1 0.62 4% 96% Restaurant 2 1.45 15% 85% Restaurant 3 0.57 6% 94% Restaurant 4 1.38 24% 14 15 16 76% 17 18 19 20 21

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