Question

Question 1                                                                                          (50 points)

During the last few years the Hyatt Hotels Corporation has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are currently an intern helping the   CFO.

a-Your first task is to estimate the Hyatt Hotels Corporation weighted average cost of capital (wacc) and you have been provided with the following most recent data:

• The firm's tax rate =20%
• The Hyatt Hotels Corporation has issued 6% coupon semi-annual payment non-callable bonds, with a maturity date of 17^th of May 2027.The bonds are sold today 17^th of May 2020 at $1022. New bonds would be privately placed with no flotation cost.
• The current price of the firm's preferred stock is $160.10, and the dividend is $10. The Hyatt Hotels Corporation will incur flotation cost of $2 per share on a new issue.
• The Hyatt Hotels Corporation common stock is currently selling at $47.08 per share. Its last dividend (D0)was $1.65,and dividends are expected to grow at 3%in the foreseeable future. The Hyatt Hotels Corporation beta is 0.56 ,the yield on T-bonds is 4% and the average return on the market is 10%.
• The target capital structure is 25% for long term debt, 2% for preferred stock and 73% for common equity. What is The Hyatt Hotels Corporation weighted average cost of capital (WACC)?

b- For the second task you are asked to copy and paste the following table in your EXCEL sheet and then complete it to calculate the Free Cash Flow of the Firm (FCFF)

The Hyatt Hotels Corporation
Summary of DCF (e=expected)
USDm	2020e	2021e	2022e	2023e	2024e
EBIT	8,568	9,169	9,768	10,299	10,832
Taxes	20%	20%	20%	20%	20%
NOPAT	?	?	?	?	?
Depreciation	1,478	1,547	1,617	1,687	1,755
Capital Expenditures	1,599	1,810	1,894	1,977	2,059
Increase in Net working Capital	-361	-210	-43	-61	-81
FCFF	?	?	?	?	?

c-For the third task you are asked to apply the multiple growth model to calculate the fair value of The Hyatt Hotels Corporation. The first stage ends in Year 5 (2024) ,while the second stage is from Year 5 to infinity. The forecasted growth rate for the second stage is 3%.You are also provided with the following table and asked to copy paste it in your excel sheet and finalize the calculation.

Data from The Hyatt Hotels Corporation financial statements 2019 in million USD
Marketable securities	26,583
Long Term Bonds	8900
Preferred Stocks	1094
Number of shares in million	4314

d- Today 17.5.2020 the Hyatt Hotels Corporation s (H) stock is trading at 47.08 USD. What is your recommendation for this stock? Buy or sell. Explain your recommendation   

Answer 1

1. We will first calculate the cost of capital of Hyatt Corporation. There are 3 components to the capital - Bonds, Preferred Share & Equity

Bonds - We will use excel function of rate to calculate the Cost of Bonds

Here,

Tenure of Bond = NPER= 7 years = 7 x 2 = 14 half years

Coupon on the bond = PMT = $1000x 6%/2 = - $30 (It is a cash outflow from Company's point of view)

Price of the bond = PV =  $1022

Maturity Value of Bond = - $1000 (This is the amount that Hyaat need to pay its bond holders at maturity)

Type = 0 (It is a value in excel which denotes the whether the periodic payments are done at start or at end. 1 = At the beginning, 0 = At the end)
The half yearly rate of Bond = Rate(14,-30,1022,-1000,0) =2.81%

Annual cost of bond = 2.81% x2 = 5.62%

After Tax cost of bond = Cost of Bond X (1- Tax rate)

After Tax cost of bond = 5.62% x (1-20%) = 4.49%

Preferred Share :

Cost of Preferred stock = D / (P0 - f),

where D = Dividend, P0 is the current price before floatation cost, f = Floatation cost

Cost of Preferred share

= 10 / (160.10 -2)

= 10/ 158.10

=6.33%

Cost of Equity

We will use both CAPM Formula & Dividend growth model to find the cost of equity

According to CAPM

Cost of Equity Re = Rf + Beta x (Rm - Rf)  

Where: Re = Cost of Equity,

Rf = Risk free rate (4.00%)

Rm = Market Returns (10%)

Beta = 0.56

Cost of Equity Re = 4% + 0.56 x (10% - 4%)

= 7.36%

According to Dividend growth model

Re = (D1 / P0 ) + g

Where:

Re = Cost of Equity

D1 = Dividends/share next year (1.65 x (1+3%))

P0 = Current share price (47.08)

g = Dividend growth rate (3%)

Re = (1.65 x 1.03 / 47.08) + 3%

= 3.61% + 3%

= 6.61%

Cost of Equity = Average of CAPM & Dividend growth

= (7.36% + 6.61%) /2

= 6.98%

WACC = We x Ke + Wd X Kd + Wpf x Kpf

= 73% x 6.98% + 25% x 4.49% + 2% x 6.33%

= 5.10% + 1.12% + 0.13%

= 6.34%

B

USDm	2020e	2021e	2022e	2023e	2024e
EBIT	8,568	9,169	9,768	10,299	10,832
Taxes	20%	20%	20%	20%	20%
NOPAT	6,854	7,335	7,814	8,239	8,666
Depreciation	1,478	1,547	1,617	1,687	1,755
Capital Expenditures	1,599	1,810	1,894	1,977	2,059
Increase in Net working Capital	(361)	(210)	(43)	(61)	(81)
FCFF	7,094	7,282	7,580	8010	8,443

FCFF = NOPAT + Depreciation - Capital Expenditure - Increase in Working Capital

C Finding the value of share

Year	1	2	3	4	5
USDm	2020e	2021e	2022e	2023e	2024e
EBIT	8568	9169	9768	10299	10832
Taxes	20%	20%	20%	20%	20%
NOPAT	6854	7335	7814	8239	8666
Depreciation	1478	1547	1617	1687	1755
Capital Expenditures	1599	1810	1894	1977	2059
Increase in Net working Capital	-361	-210	-43	-61	-81
FCFF	7094	7282	7580	8010	8443
Terminal Value of FCCF					260356
PV Factor (Using WACC of 6.34%)	0.940	0.884	0.832	0.782	0.735
PV of FCFF (FCFFt X PV Factor at time t)	6671	6440	6304	6264	197671

Terminal Value at year 5

= FCFF5 x (1+g) / (k - g)

= 8443 x (1.03)/ (6.34% - 3%)

= $260356

Value of the Firm (A) = Sum of all PV	223,350
Marketable securities (B)	26,583
Long Term Bonds C	8900
Preferred Stocks D	1094
Value of Equity E = A- C -D + B	239,939
Number of shares in million N	4314
Value of Share = E/N	$55.62

Value of Equity = Value of Firm - Value of Debt - Value of Preferred share + Marketable securities

D . The stock should be bought as the intrinsic value found above ($55.62) is almost 20% above the prevailing price of $47.08. Investor can gain up to 20% on the purchase of share.