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    How do you calculate the required rate of return, WACC, and equity value of Hyatt Corporation?

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    Need help with the following questions.

    Reuth Corporation is interested in acquiring Hyatt Corporation. Hyatt has 5 million shares outstanding and a target capital structure consisting of 35 percent debt. Reuth's debt interest rate is 10 percent. Assume that the risk-free rate of interest is 2 percent and the market risk premium is 8 percent.

    Hyatt's free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is .9. Hyatt has $10 million in debt. The tax rate for both companies is 30 percent.

    a. Calculate the required rate of return on equity using equation: rs= KRF + RPM(b)
    b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs
    c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)
    d. Calculate the value of the company's equity, using equation: Vs = Vops - debt
    e. Calculate the current value of the company's stock, using equation:
    Price per share = Vs/shares outstanding

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    Solution Preview

    a) KRF=2% RPM=8% B=0.9
    rs=2%+0.9*8%=9.2%

    b) wd=35% ws=65% rd=10% rs=9.2% Tax = ...

    Solution Summary

    The requires rate of return, WACC and equity value of Hyatt Corporation is calculated.

    $2.19