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

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.