Ra=Rd(D/V) + Re(E/V) Rd(1-T) ---> effect cost to the company

=Rd(1-T)D/V+Re(E/V) Rd=I
-TRd=TI

V=CF/WAAC Since WAAC already has the T considered. To avoid double counting need to take
=PBT(1-T)=PAT+Int-TI WAAC=Rd(1-T)D/V+Re(E/V)

WAAC of company cannnot be applied for the project

Because D/V is different for project vs company. Hence the Re and Rd will be different.
ble counting need to take out from PAT CAPM
Rd=Rf+beta d(Rm-Rf)
Re=Rf+beta e(Rm-Rf)
 Mariot Lodging Restaurant Contract
Compute WAAC m WAAC l WAAC r WAAC c

WAAC m= Rd (D/V)(1-T) + Re (E/V)

Mariot Part 1 Re= Rf + beta e(Rm-Rf)

Beta e for mariot = 1.43

Rf= 8.95%

Rm-Rf= 0.0743 Market premium over the risk free rate

Re=19.58%

Part 2 Rd for mariot = Rd fixed * 0.6 + Rd floating* 0.4

9.834
T=

WAAC=11.34%
Lodging
Unlevering
1) Beta a for Hilton= Beta e for hilton*E/V
0.757
2) Beta a for holiday 0.31

3) Beta a for ramada 0.3325

4) Beta a for quinta 0.1178

Beta a for lodging 0.379325

Relevering
Beta a lodging = Beta e for lodging * E/V
0.38= Beta e * 0.26
Beta e for lodging= 0.38/0.26 1.46

Re= Rf + Beta e ( Rm - Rf)

19.87

Rd=0.5Rfx+0.5Rfl
Rf=8.95+1.1 10.05

Rd=0.5*10.05+0.5*9.01
 WAAC = Rd D/V(1-T) +Re (E/V)

D/V=0.74
E/V=0.36
T=0.4

WAAC=9.4%
Restaurant
Beta a
Church 0.72
Collings 0.54
Frisch 0.12
Luby 0.63
McDownald 0.55
Wendy 0.85
0.5683333

Re=Rf+Beta e (Rm-Rf)
13.3743 =16.56%

WAAC=Rd(D/V)(1-T)+De(E/V)

=Rd*0.42*0.4+Re*0.58

Rd=0.25*9.52+0.75*10.52
WAAC=12.19%
Contract
Rmariot=W1* Rlodging+ W2*Rrestaurant +W3*Rcontract

Market value is not available. Take book value of identifiable assets. 1987

W1=0.61
W2=0.27
W3=0.13

WACC contract= 14.29%

 Re
Cant take 0.97 from Exb3.

the risk free rate Because Beta e computation of 41% and 60%

Step 1 : Unlevering
So using formula beta a = beta d (D/V) + beta e (E/V)
Beta d=0
So Beta a = Beta e (E/V) E/V= 1- D/V
=0.97*(1-0.41) = 1- 40% (from table 3)
Beta a= 0.5723

Step 2: Relivering E'/V' ----> new leverage

Beta e for mariot= Beta a (V'/E') Target D/V= 0.60 from Exb 3
=0.57*(1/0.4) therefore E'/V'= 0.4
Beta e= 1.425

Rf= 8.95%
Rm- Rf
Which period to take
For next 30 years should need to consider all possiblities on a longer period.
Statistacally more data points more the robust prediction
Hence take longest period. I.e 61 year data

Geometric vs Airthmetic
Airthmetic avg is better estimate of return than geometric

Example
Inv for 2 year period. Return can be +40% or -20%

Geometric avg return= sqrt (1.4*0.8) = 5.8%

Airthmetic avg return= (40-20)/2=10%

4 outcomes are possible

40% both year -20% both year 40 and -20 -20 and 40

=1000*1.4*1.4*0.25
490 =1000*1.4*0.8*0.25
280 =1000*1.4*0.8*0.25
280 =1000*0.8*0.8*0.25
180
Total= 1210
=1000(1.10)^2
1.10 is arithmetic

Therefore Rm-Rf = 7.43%

Rd

Rd for mariot = Rd fixed * 0.6 + Rd floating* 0.4

Rd fixed= 8.95+1.3 30 year maturity
= 10.25

Rd floating=30 root of ( (1+r1) + (1.r2) +…. +(1 +r30) )

Take forward looking rate if available. But Rd fixed is there.
Also the difference between long term and short term is available (4.58%- 3.54%)

Hence
Rd floating= Rd fixed (10.25%)- Difference (4.58%-3.54%)
= 9.21

Rd=(10.25*0.6)+(9.21*0.4)
Rd= 9.834
Problem Pg 342
Yield to maturity= rd
=RATE(20,110,-1294.54,1000)
8%
rd(1-T)
=8(1-0.4)
4.8%
Problem Pg 343
Rp=Dividend per sahre/current price of share
7.5