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o-na [289]
3 years ago
6

Using the CAPM, compute the cost of equity capital for the lodging division at the target leverage ratio for the division. Expla

in why this is higher than the cost of equity capital if Marriott had a zero-debt policy.
Business
1 answer:
Semenov [28]3 years ago
6 0

Answer:

Information from 1987:

There is a lot of information missing, I'll try to fill some important blanks:

Marriots's total debt $2,500 million (59% of total capital)

since debt to capital ratio = total debt / (total equity + debt)

then, we can assume equity = $1,737 million (41% of total capital)

the lodging division's number were a little different:

debt to capital 74%

equity = 26%

cost of debt = 1.1% + long term US securities interest rate (8.95%) = 10.05%

cost of equity = risk free rate + (beta x risk premium) =

  • risk free rate = short term T-bills = 5.46%
  • beta = 1.11
  • market premium = 7.92%

cost of equity = 5.46% + (1.11 x 7.92%) = 14.25%

Marriot's Lodging division's WACC = (26% x 14.25%) + (74% x 10.05% x (1 - 42% corporate tax rate) = 3.71% + 4.31% = 8.02%

If Marriot had a zero debt policy, its cost of equity would be lower because the business risk would be lower. The cost of debt is lower because interest payments decrease income taxes. But at the same time, you have to earn enough money to pay your interest obligations on time. That extra pressure to make more money, increases the company's risk. As the company's risk increases, investors will demand higher returns for their investment. That is why T-bills yield the lowest returns, simply because they are a extremely safe investment. As risk increases (more interests = more risks), investors will demand a higher rate of return and cost of equity will increase.  

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A company opts not to purchase more resources, since additional output will not increase their revenue. Which BEST
igomit [66]

Answer:

D: declining marginal benefit

Explanation:

Declining benefits is a concept explained in the theory of diminishing marginal returns.  As per this theory, additional deployment of an input while holding the other factors constant will lead to negative returns.  

The term marginal refers to one more additional input or output. Marginal returns is the additional gain resulting from the sale or production of an extra unit. A firm enjoys positive marginal returns until production gets to its capacity level. Further input after this level results in decreasing gains.

This company opts not to purchase more inputs because it has reached its optimal level. Additional inputs will lead to reduced returns and, eventually, losses.

8 0
2 years ago
Matthew​ Liotine's Dream Store sells water beds and assorted supplies. His​ best-selling bed has an annual demand of 410 units.
never [62]

<u>Given:</u>

Annual demand = 410 units

Ordering cost = $41

Holding cost = $5 unit per year

<u>To find:</u>

Number of units to be ordered each time an order is placed

<u>Solution:</u>

On calculating the number of units,

\Rightarrow \sqrt{(\frac{2(390)(38)}{5})} \rightarrow\sqrt{\frac{780\times38}{5}}= 76.99

Therefore, to minimize the total cost, approximately 77 units should be ordered each time an order is placed.

5 0
3 years ago
Casey Electronics has a piece of machinery that costs $300,000 and is expected to have a useful life of 6 years or 40,000 hours.
kozerog [31]

Answer:

None of the given options.

Depreciation expense for year 1 would be $37,500.

Explanation:

Cost = $400,000

Residual value = $50,000  

Expected hours = 40,000

Working hours (year 1) = 6,000 hours  

Now,  

Depreciation per hour = \frac{Cost-Residual Value}{Expected hours}  

Depreciation per hour = \frac{300,000 - 50,000}{40,000}  

Depreciation per hour = \frac{250,000}{40,000}  

Depreciation per hour = $6.25

Depreciation expense (year 1) = Depreciation per hour × Working hours (year 1)

Depreciation expense (year 1) = $6.25 × 6,000

Depreciation expense (year 1) = $37,500

4 0
3 years ago
Juliet spends her day making copies for instructors, filing information for the dean, and recording minutes from meetings. Julie
Leno4ka [110]

Answer:

(B) training

Explanation:

Right on edg

Hope It Helps :)

6 0
3 years ago
Read 2 more answers
Discount Outlet has net income of $389,100, a profit margin of 2.8 percent, and a return on assets of 8.6 percent. What is the c
Ratling [72]

An efficiency ratio known as the capital intensity ratio provides valuable insight into a company's financial situation.

Capital Intensity Ratio = Total Assets/Total Revenue

Return on assets = Net income/Total Assets

Total Assets = Net income/Return on Assets= $389,100/0.086

Total Revenue = Net income/Net Profit Margin = $389,100/0.028

Capital intensity ratio = ($389,100 /0.086) / ($389,100 / 0.028) =0.33

This ratio reveals how much capital or other resources a company has to have in order to make single dollar in sales. This ratio is the inverse of the asset turnover ratio, making it simple to calculate the capital intensity ratio if you already know the asset turnover ratio. For all capital-intensive firms, we require a good or higher capital intensity ratio. A company that invests a significant amount of capital in its manufacturing process is said to be capital-intensive. E.g., Power generating facilities. A company that has made significant investments in assets to generate income has a high capital intensity ratio (CIR). A company with a low CIR is able to produce larger revenues while owning fewer assets. As a result, businesses can use this ratio to modify their capital budgeting and planning.

Learn more about Capital Intensity Ratio here

brainly.com/question/14594640

#SPJ4

5 0
2 years ago
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