Estimating the cost of equity and WACC for hospitality and tourism companies.
Objective: The objective of this homework is to provide students with an understanding of cost of equity and WACC analysis in the hospitality and tourism industry sector. Students will be able to compare and contrast the cost of capital of two publicly traded companies, determine their cost of equity, cost of debt, and WACC, and provide critical analysis of their findings. By completing this homework, students will develop critical thinking and analytical skills, as well as a deep understanding of the factors that influence cost of capital.
Instructions:
Imagine that, as the CEO of a hospitality and tourism company, you want to estimate the cost of equity and weighted average cost of capital (WACC). It is crucial to know the cost of capital as it helps determine whether to accept or reject a new project or investment for your business. If the cost of capital is too expensive or poses a significant risk or much higher than competitor, it may not be financially feasible to pursue the project. Therefore, calculating the cost of capital helps inform strategic decision-making and resource allocation for the company. To calculate the WACC, you would use the previous work on the cost of debt and capital structure, and estimated cost of equity, and finally determine the WACC for two companies.
- Use the same companies from the previous homework for the cost of debt and capital structure.
- Use the capital structure and cost of debt information obtained from the previous homework.
- Use the 10-year Treasury bond rate as the risk-free rate in the calculation, obtained from the St. Louis Fed Reserve website. https://fred.stlouisfed.org/categories/22
- Calculate the average annual return of the S&P 500 for the last 10 years obtained from Yahoo Finance * This data is available on class ppt notes.
- Calculate the market risk premium by subtracting the risk-free rate from the average annual return of the S&P 500 for the last 10 years obtained from Yahoo Finance .
- Determine the beta for each company by averaging the betas obtained from at least three different sources, such as Yahoo Finance, Reuters, and Bloomberg.
- Determine the effective income tax rate from each company’s 10-K filing and use it as an alternative to the marginal tax rate in the calculation of the WACC.
- Calculate the WACC for each company using the following formula: WACC = (E/V x Re) + ((D/V x Rd) x (1 – ETR)), where E/V is the proportion of equity to the total assets, Re is the cost of equity, Rd is the cost of debt, D/V is the proportion of debt to the total assets, and ETR is the effective income tax rate.
- Write a brief report (1 page) summarizing your findings, including the cost of equity, WACC, and critical analysis of the similarities and differences between your company and competitor’s cost of capital and overall financial performance. Include an explanation of the potential factors that may influence these differences.
