Question

You are a CEO of a national restaurant chain. You are facing an investment proposal of building 20 new hotels across the country. Since hotel is a new business line for your company, the management team finds Hilton Hotel Corporation as one pure play company to assist the evaluation of this investment proposal. With the following information, what discount rate should you use to evaluate this investment proposal? (Round your answer to two decimal places.)

Information on the market
1-year government bond return	0.85%
10-year government bond return	2.41%
Expected market risk premium	5%
Information on Hilton
Equity return	6.20%
Equity beta	0.76
Debt-to-Value ratio	14%
Marginal tax rate	40%
Information on your company
Book value of long-term debt	$5,000,000
Book value of equity	$5,000,000
Share Price	$15
Number of shares outstanding	1,000,000
Debt rate premium above government bonds	3%
Marginal tax rate	40%

The equity beta for this hotel investment project is ________________

Answer 1

The investment proposal should be evaluated based on the discount rate calculated using the Capital Asset Pricing Model (CAPM). The calculated rate is 9.06%. However, the pure-play method would be required to calculate the Equity Beta of the concerned company. All the calculations have been done on two different pages, both of them are attached below.