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Assignment 8

In: Business and Management

Submitted By Samuelto
Words 867
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As it is explained in the Exxon example, a firm might use a Divisional WACC, by identifying comparison firms(comps). These are firms that would have a similar risk and capital structure than the division for which we are trying to find a divisional WACC. The idea is to use an average WACC of these firms as an estimate WACC for our division. This would reduce the risk of the firm taking overinsting/underinvisting in its divisions.


Our project, since it has very low risk, could be an adding value project. This can be explained the following way: With the new project the firm would have a different WACC, since it’s Beta would change ( the very low beta of the project would influence the current firm’s beta, which would lead to a lower required rate of return). We must compare this new WACC with the expected return of the average of the firm’s current WACC and the project’S IRR. If this expected rate of return is higher than the newly calculated firm’s WACC, it would mean that the project is a value-increasing investment.


a. While the Domestic Beer and International Beer could be seen as a similar business segment, I think it would be necessary to have different cost of capital for each of this business segments for the following reasons: They may be selling almost the same product, but the circumstances around them are really different. Geographic, political, economical differences lead to risk differences, which leads to different cost of capital. Obviously for packaging we would need different WACCs too. It is really difficult to search for comps for this firm in Domestic Beer, since it has a market share of 49,2% (2010) but we could use as comps the following: Miller Coors, Pabst Brewing CO, Yuengling and Son, Inc , Boston Beer Co and North American Breweries.
As for the International Division we could use as comps: SABMiller, Heineken International, Carlsberg Group and China Resource Snow Breweries Ltd, which are the biggest brewery companies after ABInBev.
Fort he packaging division, I will asume it operates all around the world. If it is only the US division, we should compare it to the top packaging companies in the US. As for the world, the comps would be : International Paper Company, Tetra Laval, Reynolds Group, Amcor,Rock-Tenn Company, Crown Holdings, Ball Corporation, Owens-Illinois, Toyo Seikan Group, Ardagh, Rexam, Mondi, Sealed Air Corp, Rengo Co, MeadWestvaco Corp, Nine Dragons Paper, Greif, Bemis, ALPLA and Graphic Packaging.
Last, for the enternainment division: Walt Disney Parks and Resorts, Merlin Entertainments Group, Universal Studios Recreation Group, Parques Reunidos(Spain), Six Flags Inc, SeaWorld Parks & Entertainment, Cedar Fair Entertainment Company, OCT Parks China.
b. Yes it affects the analysis. I was analyzing in a competitive atmosphere but being internal sales representing 63% of the total sales of the packaging business, this means that this division is more dependant on how well the other divisions do than on its own market. It would not be comparable to the other companies in the industry, unless they had the same influence of its intern sales, this means the same capital structure and risks, fact that I don’t know.


As we can see in the Spreadsheet and in the pdf, the U.S. Government Interes Rates(April, 1988) are the following:

30-year Maturity 8,95%(Marriot and lodging)
1-year Maturity 6,90%(Restaurant and contracts)

From the Exhibit 4 we can obtain Risk Premium
Risk Premium for Restaurants and Contract= -0,0023
Risk Premium for Marriot and Lodging= 0,0792

From the Table A we can obtain:

Beta levered= Beta unlevered [1+(1-T) D/E]
Beta levered= 1,11[1+(0,56)*0,6/0,4]
Beta levered= 2,04

Ke(Cost of Equity)= Free Risk +Beta levered*risk Premium
Ke= -0,0269 +(2,04*0,0792)
Ke= 13,47%

Kd(Cost of debt)= Us government 30 year maturity rate+ Premium govt rate
Kd= 8,95%+1,3%

Marriot’s WACC = (1-T)*Kd*D/V+Kd*E/V
WACC= 8,84%

2. Merriot can experience overinvesting/underinvesting in some of its divisions, specially between lodging and restaurant/contracts it exists a big different, which most likely turns into differences between costs of capital. The divisions have different capital structure too, another point against a single WACC


Beta levered= Beta unlevered[1+(1-T)*D/E]
Beta levered= 1,09[1+0,56*2,85]
Beta levered= 2,83

Ke=Risk free rate + Beta*Risk Premium
Ke= -0,0269+ 2,83*0,0792
Ke= 19,72%

Kd= U.S government rate 30y maturity+ Premium above it
Kd= 8,95%+1,10%
Kd= 10,05%

WACC=(1-T)*Kd*D/V+ Ke*E/V

Following the same steps, but utilizing the 1-year Maturity 6,90% we calculate Restaurants and Contracts Divisions
Restaurants WACC= 5%
Contracts WACC=4,93%

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