Could you help me to fill the blanks? 1: Determine Financial Structure (2 pts) A
ID: 2776709 • Letter: C
Question
Could you help me to fill the blanks?
1: Determine Financial Structure (2 pts) Amount $1,400.0M $4.300.0M 24.30% 75.70% http://quicktake.morningstar.com/StockNet/bonds.aspx?Country USA&Symbol;=H http://quicktake. morningstar.com/StockNet/bonds.aspx?Country-USA&Symbol;=H | 2: Determine Cost of Debt (5 pts) -9.450% http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ Risk Free Rate of Return (5 Year T-Bond) Credit Rating Bond Rating Spread Total Cost of Debt (Before Tax) http://quicktake.morningstar.com/StockNet/bonds.aspx?Country-USA&Symbol-H; |http://w4stern.nyu.edu/-adamodar/New 2.250% Home Page/valguestions/syntrating.htm Current Bond Yeild to Maturity 2.640% |http://quicktake.morningstar.com/StockNet/bonds.aspx?Country=USA&Symbol;=H Average cost of debt before taxes (kdbt) Top Tier Corporate Tax Rate Cost of Debt (kd) 35.000% Inttp://en.wikipedia.org/wiki/Corporate tax in the Un.ted States 3: Calculate Hyatt's Equity Beta (3 pts,) Date 1st day after date if date is unavailable Hyatt 28.75 29.81 29.62 33.43 38.96 41.17 40.46 37.09 S&P; 500 S&P; 500 A Hyatt 09.11.1 09.12.1 10.1.1 10.2.1 10.3.1 1095.63 1115.10 1073.87 1104.49 1169.43 1186.69 1089.41 1030.71 1101.60 1049.33 1141.20 1183.26 1180.55 1257.64 1286.12 1327.22 1325.83 1363.61 1345.20 1320.64 1292.28 1286.94 1204.42 -4% 13% 17% 10.5.1 10.6.1 10.7.1 10.8.1 10.9.1 -8% -5% -2% -8% 37.66 37.39 40.30 -5% -4% 10.11.1 10.12.1 45.76 48.59 45.75 43.04 -6% -6% 44.58 40.82 38.79 38.76 33.63 -2% -2% -8% -5% -6% -13%Explanation / Answer
As per the data provided by you,
Total Cost of Debt (before taxes)= A = Risk Free Rate of Return + Bond Rating Spread
= -9.45% + 2.25% = -7.20%
Current Bond YTM = B = 2.64%
Average Cost of Debt Before Taxes = (A + B)/2 = (-7.2 + 2.64)/2 = -2.28%
Cost of Debt = Before Tax Average Cost of Debt * (1 - Tax Rate) = -2.28 * (1 - 0.35) = -2.28 * 0.65 = -1.482%
Expected Rate of Return on Equity using CAPM = Risk Free Rate of Return + Beta * Market Risk Premium
= 8.4% + 1.42 * 5.5% = 16.21%
Weighted Average Cost of Capital =
Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity
= 24.3% * (-1.482%) + 75.7% * 16.21%= 11.91%
WACC represents the minimum rate of return that the investors of the firm expect. This WACC is used for capital budgeting decisions. It is used as the discount rate to calculate the Net Present Value of the project. If NPV is greater than 0, then the project is undertaken. Also, while making capital budgeting decisions using the IRR method, a project is accepted only when the Internal Rate of Return (IRR) is greater than the WACC which makes the NPV positive. Thus, in case of Hyatt, if the IRR of any project is greater than 11.91%, then only is should be undertaken. In other words, if the NPV of the project using a discount rate of 11.91% is positive, then only it should be accepted.