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capital
Timothy A. Thompson
Executive Masters Program
As an opportunity cost
The rate of return investors could earn
elsewhere on projects with the same risk
and capital structure
CAPM
rj = rf + j (rm - rf)
assets with betas less than one
demand lower returns than rm
assets with betas greater than one
demand higher returns than rm
Schwab
Returns
-0.10
-0.05
0.4
0.2
0
-0.20.00
-0.4
Returns on Market
0.05
0.10
Charles Schwab
Regression Statistics
Multiple R
0.494088888
R Square
0.24412383
Adjusted R Square
0.231091482
Standard Error
0.100953718
Observations
60
ANOVA
df
Regression
SS
MS
0.190911525
0.190912
Residual
58
0.591115881
0.010192
Total
59
0.782027406
Intercept
Slope on market
Coefficients
Standard Error
Significance F
18.73215
t Stat
6.02E-05
P-value
Lower 95%
Upper 95%
0.006291272
0.014464831
0.434936
0.665223
-0.02266
0.035246
2.30
0.53
4.33
0.00
1.23
3.36
Project-beta
Adjusted
Cost of capital
Expected
Rates
Of
Return
Y
Company-wide
WACC
Avg. company
Project beta
Project Beta
Equity risk
Equity beta risk has two sources:
Business risk (the risk of the asset cash
flows)
which would equal the equity risk if the
business were unlevered (I.e., if it had no debt)
Financial risk
The magnification of the business risk from the
perspective of the equityholders because of
the presence of debt in the capital structure.
Extra credit
For extra credit, bring back a
contract services division WACC
There are no peers given for contract
services
But you can estimate WACC, reu, reL,
etc. for Marriott as a whole!