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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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Consider Derek's budget information: materials to be used, $64,750; direct labor, $198,400; factory overhead, $394,800; work in
natita [175]

Answer:

Option (c) is correct.

Explanation:

Given that,

Materials to be used = $64,750;

Direct labor = $198,400;

Factory overhead = $394,800;

Work in process inventory on January 1, = $189,100;

Work in progress inventory on December 31, = $197,600

Firstly, we are calculating the manufacturing cost by adding direct material, direct labor cost and factory overhead. It is calculated as follows:

= Direct material + Direct labor + Factory overhead

= $64,750 + $198,400 + $394,800

= $657,950

Cost of goods manufactured determine the value of goods produced during a period of time. It refers to the cost that is incurred to convert the raw material into the finished goods.

Therefore, the cost of goods manufactured is calculated as follows:

= Manufacturing cost + Opening work in process - Closing work in in process inventory

= $657,950 + $189,100 - $197,600

= $649,450

3 0
3 years ago
Luther's Operating Margin for the year ending December 31, 2008 is closest to: Group of answer choices 0.5% 0.7% 5.4% 6.8%
svlad2 [7]

Answer:

the operating margin is 5.4%

Explanation:

The computation of the operating margin is shown below:

As we know that

Operating Margin = Operating Income ÷ Sales

= $31.3 ÷ $578.3

= 5.4%

Hence, the operating margin is 5.4%

It could be determined by dividing the operating income from the sales

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2 years ago
Santa Claus is trying to forecast demand for coal this Christmas. For the past 300 years, the numberof naughty children (who wil
Darina [25.2K]

Answer:

The correct answer is B. Trend analysis.

Explanation:

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This method allows us to know the direction and speed of the changes that have occurred in the financial situation of the company over time, so it is considered as a method of horizontal analysis.

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3 years ago
A broker is an agent who:A. Trades on the floor of an exchange for himself or herself.B. Buys and sells from inventory.C. Offers
Viefleur [7K]

Answer:

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Explanation:

6 0
2 years ago
Outline four merits of indirect taxes​
lesantik [10]

Answer:

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3.Not Easily Evadeable: ...

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hope it helps!!

pls make me brainlest!

:)

5 0
3 years ago
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