A complete valuation of Starwood hotel with all the methods of valuations. 1. Corporate Governance 2. Financial Analysis 3. Company Valuation 4. Capital Budgeting 5. Portfolio Assignment and assessment 6. Valuation of long term securities 7. Leasing 8. Derivatives and Options strategy 9. Capital Structure 10. Bottom up and dividend policy

1. Corporate Finance
“The Project” – Starwood Hotels and Resorts
By Vipul Sonavane – MBA - Waitan

2. Starwood hotels and Resorts
Test of independent Board of Directors
How many BoD members on the Board of your company?
There is 1 member on the Board of Directors:
BRUCE W. DUNCAN
Chairman and President & Chief Executive Officer, First Industrial Realty Trust Inc.
FRITS VAN PAASSCHEN
President & Chief Executive Officer, Starwood Hotels & Resorts Worldwide, Inc
ADAM ARON
Chief Executive Officer, Philadelphia 76ers
AMBASSADOR CHARLENE BARSHEFSKY
Senior International Partner, Wilmer,Cutler & Pickering
THOMAS CLARKE PH.D
President, New Business Ventures, Nike, Inc.
CLAYTON C. DALEY, JR.
Retired Vice Chair & Chief Financial Officer, Procter & Gamble
LIZANNE GALBREATH
Managing Director, Galbreath & Company
ERIC HIPPEAU
Partner, Lerer Ventures
AYLWIN B. LEWIS
President and Chief Executive Officer, Potbelly Sandwich Works, LLC
STEPHEN R. QUAZZO
Chief Executive Officer, Managing Director & Co-founder, Pearlmark Real Estate Partners, LLC
THOMAS O. RYDER
Retired Chairman & Chief Executive Officer, Readers Digest Association, Inc
How many of them are insiders (management) how many are “independent”?
Mr. Fritsvan Paasschen is the only one insider out of all 11 members.
Are the compensation and audit committees composed of entirely outsiders?
Yes, they have a policy of putting at the maximum 2 board members on the audit committees. Right
now there is no one from inside the company all the members are outsiders.
Company Evaluation
What is your company’s score and place on the list of “the world’s most admired companies”?
Starwood Hotels and Resorts has a very high overall score of 7 which puts it in the top of “the 358
most admired companies”

3. What is the “governance ranking” of your company on Yahoo Finance ?
Starwood Hotels and Resorts’ Governance Risk Indicator (GRI®) as of Jan 1, 2013 is:
Looking at the number of people on the board it’s quite a high number. But there is no concern
about members of the board and members of the Audit committee as they are mostly outsiders.
Compensation needs to be improvised and shareholders right is in safe hands.
GovernanceMetrics International (GMI), an independent research and rating agency that evaluates
corporate governance of more than 4,200 companies worldwide, assigned HOT an overall perfect 7
ranking. HOT earned high ratings in each of the categories in GMI's assessment: board accountability,
financial disclosure and internal controls, shareholder rights, remuneration, market for control and
corporate behavior, which includes health, environment, safety and social responsibility.
Based on your findings how you assess (on a scale of 1-10) the “governance” of this company and
your influence as an individual shareholder…
Influence as an individual shareholder is rather limited. The biggest direct shareholder, the chairman
of the Board as well as Executive Chairman Mr. Frits, holds about 0.23 million shares out of 193
million shares. Any other individual shareholders follow in a distance with less than 0.5% of the total
shares. Most of the shares are owned by the Institutions and mutual funds.
Show all your findings in your output and show your “process of thinking” while you were estimating
your scale score…
Starwood Hotel has very well distributed business in Managed hotels and Brand Franchising and
licensing. They have just shifted their head quarter to ME, looking forward to the business
opportunity in Middle East and in Asia. They have already entered into Asia like in India and in China.
Now they are looking very close to this business in Asia and for expansion.
Different brands of Starwood has won different awards in the segments like design, favourite resorts
list etc. So I would like to give the company the same rating as that of Yahoo i.e. 7. Company has
long term sustainability and less risk due to diversified sections.
Company Holders’ Structure
Did your company file any 14/DEF (SEC)?
Yes, a notification to the shareholders or proxy was issued as recently as 18 April 2013.
Who are the top 10-20 shareholders in your company ?
Top Institutional Holders
Holder
Shares
% Out
Value*
10,434,891
5.36
598,545,347
Dec 31, 2012
Vanguard Group, Inc. (The)
9,526,023
4.89
607,093,445
Mar 31, 2013
State Street Corporation
8,980,404
4.61
515,115,973
Dec 31, 2012
Waddell & Reed Financial Inc.
Reported

4. Harris Associates L.P.
7,959,591
4.09
507,264,734
Mar 31, 2013
Marsico Capital Management, LLC
7,229,342
3.71
414,675,057
Dec 31, 2012
Lateef Investment Management
5,558,355
2.86
354,233,964
Mar 31, 2013
BlackRock Institutional Trust
Company, N.A.
5,229,277
2.69
333,261,823
Mar 31, 2013
Morgan Stanley
5,134,154
2.64
327,199,634
Mar 31, 2013
GCIC Ltd.
3,949,823
2.03
226,561,847
Dec 31, 2012
22,248,696
11.43
1,276,185,202
Dec 31, 2012
Shares
% Out
Value*
Ivy Asset Strategy Fund
7,689,995
3.95
441,098,113
Dec 31, 2012
Price (T.Rowe) Growth Stock Fund
Inc.
3,754,564
1.93
215,361,791
Dec 31, 2012
Price (T.Rowe) Blue Chip Growth
Fund Inc.
2,885,400
1.48
165,506,544
Dec 31, 2012
Vanguard Total Stock Market Index
Fund
2,625,567
1.35
150,602,523
Dec 31, 2012
Vanguard Mid-Cap Index Fund
2,565,568
1.32
147,160,980
Dec 31, 2012
Vanguard 500 Index Fund
1,820,284
0.94
104,411,490
Dec 31, 2012
SPDR S&P 500 ETF Trust
1,809,384
0.93
115,312,042
Mar 31, 2013
Vanguard Institutional Index FundInstitutional Index Fund
1,795,813
0.92
103,007,833
Dec 31, 2012
Fidelity Growth Company Fund
1,445,000
0.74
87,176,850
Feb 28, 2013
Price (T.Rowe) Institutional Large Cap
Growth Fund
1,441,400
0.74
82,678,704
Dec 31, 2012
Price (T.Rowe) Associates Inc
Top Mutual Fund Holders
Holder
Major Direct Holders (Forms 3 & 4)
Holder
Shares
Reported
VAN PAASSCHEN FRITS D
238,536
Feb 27, 2013
PRABHU VASANT M
156,033
Apr 10, 2013
DUNCAN BRUCE W
43,691
Mar 30, 2013
Reported

5. TURNER SIMON
103,938
Mar 27, 2013
93,676
Feb 29, 2012
AVRIL MATTHEW E
Annual Report
According to Starwood Hotel annual report they have two main segments and revenue is divided
into 4 segments: Owned, leased and consolidated joint venture hotels, Vacation ownership and
residential sales and services, Management fees, franchise fees and other income, Other revenues
from managed and franchised properties.
These segments are again divided into the regions as mentioned in chart below. USA has the major
stake in sales revenue for Starwood hotel.
Segment Analysis
StarWood Hotels and Resorts
Managed Hotels.
Brand Franchising and Licensing.
United States
33.50 %
United
States
69.90
Asia Pacific
30.50 %
Europe
Middle East
and Africa
Latin
America,
Caribbean &
Canada
14.80 %
Latin
America,
Caribbean
& Canada
Asia
Pacific
12.70 %
Europe
7.00
8.50 %
Middle
East and
Africa
0.50
Total
Country
Canada
Italy
Spain
Australia
Mexico
13.60
9.00
100.00 %
Total
100.00
2012.00
2011.00
2010.00
2011.00
2009.00
2008
Revenues
Revenues
Revenues Revenues Revenues Revenues
11.40
11.00
10.80
11.00
9.30
9.00
6.70
7.40
7.10
7.40
7.60
8.50
6.10
5.90
5.60
5.90
5.30
4.80
5.00
4.90
4.10
4.90
4.70
5.40
4.60
4.20
4.10
4.20
2.80
2.80
Business Risk Assessment:

6. Starwood is Subject to All the Operating Risks Common to the Hotel and Vacation Ownership and
Residential Industries. Operating risks commonto the hotel and vacation ownership and residential
industries include e.g.:
• changes in general economic conditions, including the severity and duration of downturns in the
United States, Europe and global economies;
• impact of war and terrorist activity (including threatened terrorist activity) and heightened travel
security measures instituted in response thereto;
• domestic and international political and geopolitical conditions;
• travelers’ fears of exposures to contagious diseases;
• decreases in the demand for transient rooms and related lodging services, including a reduction in
business travel as a result of general economic
conditions;
If Starwood is Unable to Maintain Existing Management and Franchise Agreements or Obtain New
Agreements on as Favorable Terms, OurOperating Results May Be Adversely Affected. They are
impacted by their relationships with hotel owners and franchisees. Their hotel management
contracts are typically long-term arrangements, but most allow the hotel owner to replace them in
certain circumstances, such as the bankruptcy of the hotel owner or franchisee, the failure to meet
certain financial or performance criteria and in certain cases, upon a sale of the property
Starwood and their third party licensees may not be able to sell residential properties using their
brands for a profit or at anticipated prices.
Assets development:
We use the data for the past 5 years as I assume this is most representative for the valuation of the
company. There is no particular growth pattern for the total Asset as the long term asset is volatile.
Following is the breakdown and range of the asset:
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Prepaids & Other Current
Assets
Total Current Assets
Long Term
Investments/Investment in
Unconsolidated affiliates
Land & Improvements
Buildings & Improvements
Airplanes
FF&E
Leasehold Interest in land
Gross PPE
Accumulated Depreciation
Property Plant and Equipment
305
320
586
361
454
278
569
812
753
87
389
513
802
447
783
552
986
347
1,919
421
2,534
238
2,306
174
1,491
239
2,166
5,584
-2,422
3,162
5,783
-2,513
3,270
5,971
-2,648
3,323
5,823
(2,473)
3,350
6,070
(2,471)
3,599

7. Net
Goodwill
Intangible Assets, Net
Accumulated Amortization
Other Assets
Equity and other investment
Investment in unconsolidated
affiliates
Deferred Income taxes
1427
598
-
2,067
2,057
-
2,063
2,235
-
-
859
260
789
312
531
344
1,064
-
636
Total Assets
801
259
639
979
982
639
8,761
9,703
8,861
9,560
9,776
Total Asset million USD
10000
9800
9600
9400
9200
Total Asset million USD
9000
8800
8600
2007 2008 2009 2010 2011 2012 2013
Assets financing:
Starwood’s asset was mainly financed by the equity. The total-debt ratio is 34%, which
acknowledges that total assets are financed for 34% by total debt.
Sales growth: Sales have grown at an annual growth rate of around 10%. On the chart we can see a
rapid growth in sales interrupted by a major drop in 2009, due to the financial crisis.
Segment wise Sales revenue:

8. 3000%
2500%
2000%
Expected Growth
ROC
1500%
Reinvestment
1000%
Beta
500%
0%
35.00% 35.00% 35.00%
Total Sales revenue trend:
Total Sales Revenue
7,000
6,000
5,000
4,000
Sales Revenue
3,000
2,000
1,000
2007
2008
2009
2010
2011
2012
2013
Profitability:
Profit margin varies from 8.9% high in 2011 to a 0% low in 2009 and ends with an average 5.38% in
2011. 2009 was a recession year and company could not perform well and lost the profit margin.

9. Net Profit Margin
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
8.93%
7.44%
6.13%
4.41%
2012
2011
2010
Profit Margin
-0.02%
2009
2008
Cash generation and usage:
At December 31, 2012, Starwood had approximately USD1.2 billion in cash on hand. Income and
cash flows are largely dependent on debt, relation between franchisee, recession period, Debt
because of leasing etc. Starwood believes that cash on hand and cash generated from operations will
be sufficient to fund its operating needs and planned capital expenditures, (Form 10-K, 2012)
Cash and cash equivalents at end of year has jumped after the financial crisis, from USD 0.5 billion in
2009 to USD1.2 billion in 2012
Cash and cash equivalent
1400
1200
1184
1000
800
600
764
646
400
571
641
Cash and cash
equivalent
200
0
Total Growth Assets:
Starwood has a market capitalisation of USD12 billion. We calculate this amount by multiplying the
total outstanding shares (193 million) with the stock price (62.09 per 29 March 2013). We replace

10. the book value of total stockholders’ equity with the market capitalisation and then calculate the
Total Growth Assets. Starwood has a total growth in assets of 65%. (Form 10-K, 2012)
Total Assets
in Place
8.8 B USD
(60%)
Total Growth
Assets
2 B USD
(40%)
Total Debt
1.6 B USD
(34%)
Total Equity
3.1 B USD
(66%)

11. Ratio Analysis
2012
Liquidity ratios
Current ratio
Quick ratio
2011
2010
2009
2008
0.95
0.48
1.27
0.58
1.07
0.70
0.74
0.35
0.81
0.44
2.00
1.72
1.53
1.41
1.60
0.71
0.59
0.52
0.54
0.59
0.63
4.64
0.68
3.14
0.73
2.44
0.79
-0.29
0.78
2.59
Profitability ratio
Profit Margin on Sales
ROE
ROA
7.44%
0.1498
0.71
8.93%
0.1699
0.59
6.13%
0.1259
0.52
-0.02%
-0.0005
0.54
4.41%
0.1567
0.59
Market Value ratio
EPS
P/E
Book value per share
Market to Book ratio
$2.91
20.38
$16.25
3.65
$2.59
18.66
$15.63
3.09
$2.61
22.99
$13.50
2.61
$0.41
86.97
$10.13
3.48
$1.82
10.95
$8.96
2.22
Asset ratios
Fixed Asset turnover
ratio
Total Asset turnover
ratio
Debt Ratios
Debt ratio
Time interest ratio
Company Valuation
Regression Beta Calculation
I performed a regression to calculate the Beta for HOT, based on the 5 years monthly return of HOT
stock. I used the leading S&P500 index as a reference to compare the performance of the HOT stock
vis-à-vis the market. Also I cross verified with the slope function.
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.720135
R Square
0.518595
Adjusted R
Square
0.514712
Standard
Error
0.077167
Observations
126
ANOVA

12. df
Regression
Residual
Total
Intercept
X Variable 1
1
124
125
Coefficients
0.006771
1.871854
Significance
SS
MS
F
F
0.795438 0.795438 133.5792
2.04E-21
0.738395 0.005955
1.533833
Standard
Error
t Stat
P-value
0.00693 0.97708 0.330432
0.161958 11.55765 2.04E-21
Upper
Lower
Upper
Lower 95%
95%
95.0%
95.0%
-0.00695 0.020487 -0.00695 0.020487
1.551294 2.192414 1.551294 2.192414
When plotting the results in a graph of residuals, we can clearly see the regression line with
coefficient 1.87
0.5
0.4
Residuals
0.3
0.2
Series1
0.1
Linear (Series1)
0
-20.0000%
-10.0000% 0.0000% 10.0000%20.0000%
-0.1
-0.2
X Variable 1
Cost of Capital – WACC
Calculation of cost of capital using the Market value of equity and debt.
HOT
Pre income tax
Income tax
Tax rate
Total debt
r(debt)
Rf - 10yr Bonds
DRP - credit rating BBB
r(equity)
Rf - 10yr Bonds
2012
618
148
23.95%
3695.00
2.86%
1.76%
2.00%
12.57%
1.76%
2011
427
-75
-17.56%
4614.00
4.56%
1.88%
2.00%
13.17%
1.88%
2010
338
27
7.99%
5144.00
4.87%
3.29%
2.00%
13.01%
3.29%
2009
-291
-290
99.66%
4910.00
0.02%
3.84%
2.00%
11.99%
3.84%
2008
326
72
22.09%
5394.00
3.28%
2.21%
2.00%
14.23%
2.21%
Assumptions
www.damodaran.com
www.damodaran.com
www.damodaran.com

13. Beta
ERP
Total Equity
Stock price
Oustanding shares
Total Debt + Total Equity
1.87
5.78%
3137
59.35
193
6832.00
Capital Structure (D+E)
Wd
We
100.00% 100.00% 100.00% 100.00% 100.00%
54.08% 60.97% 67.55% 72.91% 76.89%
45.92% 39.03% 32.45% 27.09% 23.11%
WACC = wd*rd*(1tax)+we*re
1.87
6.04%
2954
48.28
189
7568.00
6.95%
1.87
5.20%
2471
59.93
183
7615.00
8.41%
1.87
4.36%
1824
35.27
180
6734.00
7.25%
3.25%
1.87
6.43% www.damodaran.com
1621
17.13
181
7015.00
5.25%
Free Cash Flow Calculation
I calculate the Free Cash Flow from EBIT using financial data found in the 10-K annual report.
2012
1184
-362
Operating Cash flow
Capital Expenditure
FCF = Operating Cash Flow Capital Expenditure
2011
641
-385
2010
764
-227
2009
571
-196
2008
646
-476
822
256
537
375
170
On the graph we can see a knack in 2009 due to the financial crisis.
FCF
900
822
800
700
600
537
500
400
FCF
375
300
256
200
170
100
0
2012
2011
2010
2009
Short term and long term period of future cash flow:
Tax
20122016
35.00%
20172021
35.00%
LT
35.00%
2008

14. Expected Growth
ROC
Reinvestment
Beta
8%
25.72
56%
1.87
Cost Of Capital
7.45%
Declining
Declining
Declining
1.70
7.30%
5%
12%
38%
1.50
5.10%
Assumptions:
Tax: Tax rate is 35% on average in the past and predicted to stay the same in the future.
Expected Growth: EBIT growth will continue in the first 5 years as the company has healthy financials
and just invested heavily in new growth opportunities - hence the high capex in 2012. I expect the
EBIT growth to slow down to about 3%,
ROC and Reinvestment: Using last year’s Return on Capital, looking at the expansion plans I don’t
think that ROC will be maintained it will get declined. Both rates will decline linearly to a sustainable
long term rate.
Beta: Beta on the long term will decline to market beta of 1.5.
Cost of Capital: Will remain around 7% in the short time and transition period, while declining to
5.1o% for the long term due to a more optimal debt-equity structure. See Capital Structure Model
EBIT
NOPAT
Reinvestment
FCFF
PV
2012
11,662
6,997
3,903
3,094
2,853
2013
12,644
7,586
4,231
3,355
2,852
2014
13,708
8,225
4,588
3,637
2,851
2015
14,861
8,917
4,974
3,943
2,850
2016
16,112
9,667
5,392
4,275
2,850
Transition Period and Long Term – 2017 to 2021 and in perpetuity
2012
1232.59
5
2013
1355.85
5
2014
1491.4
4
-2422
2591.54
2772.9
5
-2967.05
3174.75
- Capital
Expenditu
res
-1646
1761.22
1884.5
1
-2016.42
- Change
in WC
-149
47.4075
605.595
478.127
EBIT (1-t)
+
Depreciati
on
= FCFF
Terminal Value (in '05)
Value of the Firm
52.148
25
550.84
93
2015
1640.584
57.36308
632.5875
2016
1804.64
2
2017
1985.10
7
2018
2095.47
8
2019
2020
2193.17 2275.5
1
72
2021
2340.29
9
3396.98
3627.97
- 4114.9
3867.42
4
4370.06
2157.57
-2308.6
2476.87
2645.14 2813.4
2981.67
63.0993
8
724.365
3
69.4093
2
827.317
1
70.2422
3
874.129
6
70.0345 68.687
6
23
900.851 905.35
7
28
66.1277
3
885.781
8

15. After adding cash and subtracting the market debt from the total present values of the future free
cash flows, I get to the Firm Value. Divided by outstanding shares, I get the Value per Share of the
firm.
PV of EVA
+ Capital Invested
+ PV of Chg Capital in Yr
10
= Firm Value(Mil USD)
# of shares (Mln)
Value per share($)
3598.863
2120
4874.732
10593.6
197
53.7746
Stock Analysis
Expected Return on Stock
Using 5 year annual returns on the company stocks, I came to the following result for the Expected
return and risk of the stock.
STDEV
11.08%
Expected RET
14.19%
See Addendum for detailed research and analysis.
3 Stock Portfolio
For the 3 stock portfolio I chose my company Starwood Hotel and resorts, active in the major
consumer discretionary mainly in hotel industry. I compared this with consumer staples a house hold
industry company Kimberly clark and then this I have compared with
Finally, I compared this portfolio with the telecommunication services company which work in
technology i.e. Century link Inc. (website: http://www.sectorspdr.com/correlation/)
To compare the 3 stocks, I first developed scenarios to compute the expected returns of the stock
and their risk or Standard deviation.
Good
Normal
Bad
Awful
(2005/2006/2007)
(2004/2008/2011/2012)
2009
2010
I used the leading S&P500 index to develop 4 scenarios: good, normal, bad and awful. Using these 4
scenarios, I am then able to calculate the Expected returns and risks for each stock respectively.
HOT
Return
Probability*Return Probability*[Return-E(ri)]^2
1.67%
0.56%
1.22%

16. 2.44%
105.37%
67.03%
1.09%
11.71%
7.45%
E(Return of HOT)=
1.50%
7.95%
2.37%
23.50% Std(HOT)=
11.25%
KMB
Probability*[ReturnReturn
Probability*Return E(ri)]^2
5.35%
1.78%
0.05%
8.95%
3.98%
0.00%
26.18%
2.91%
0.33%
3.25%
0.36%
0.04%
E(Return of
KMB)=
12.38%
Std(KMB)=
3.93%
CTL
Probability*[ReturnReturn Probability*Return E(ri)]^2
7.40%
2.47%
0.01%
-5.05%
-2.24%
0.93%
44.93%
4.99%
1.40%
38.00%
4.22%
0.91%
E(Return of
CTL)=
9.52% Std(CTL)=
6.27%
I then develop the Covariance Matrix for my 3 stocks.
HOT
KMB
CTL
HOT
KMB
1.27%
2.47%
0.20%
2.47%
0.15%
1.05%
CTL
0.20%
1.05%
0.39%
And finally, I can find the Minimum Variance Portfolio for 3 stocks.
Std(Rp)
E(Rp)
HOT
KMB
CTL

17. 7.85%
13.89%
29.00%
11.00%
60.00%
E(Rp)
0.25
0.2
0.15
E(Rp)
0.1
0.05
0
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Market Valuation of Debt
Assuming a 100% redemption value and par value is USD100.
Settle Date
Maturity
Coupon
Bond Price
Redemption Value
Coupon Payments per year
YTM
Calculated bond price
HOT
02-042013
02-042014
0.1000
111.10
90
2
-0.11
108.00
HOT
02-042012
15-052018
0.0675
121.90
100
2
2.15
2.92
371
HOT
02-042012
15-022023
0.0313
99.40
100
2
3.20
2.93
Value outstanding (million)
200
Notes outstanding (million)
Market value Debt (million)
12.34
3.71
3.50
2.05
120.00
451.88
347.90
256.41
Total Market Value Debt
1,176
Growth rate of Earnings per Share
All data can be found in the 10-K annual report
350
HOT
02-042012
12-012019
0.0715
125.20
100
2
0.03
125.20
205

18. Net Income
Total Equity
ROE
323
1971
16.39%
Retained
Earning
Retention ratio
126
57%
DPS
EPS
Retention ratio
1.25
1.34
55%
G(EPS)
19%
Dividend Valuation:
2008
Dividen
d
EPS
Payout
Ratio
g
DCF
2009
2010
2011
0.90
1.82
0.20
0.41
0.30
2.61
0.50
2.59
49.51%
-77.78%
15.75%
1.157541
49.32%
50.00%
11.17%
1.111732
1.2359480
4
0.2471896
08
11.51%
66.67%
13.33%
1.13334
1.4557293
93
0.4367188
18
19.33%
150.00%
14.71%
1.147148
1.5095877
29
0.7547938
64
1.157541
1.041786
9
Share
Price
2012
2013
1.25
1.38
2.91
42.93%
10.00%
12.75%
1.127486
1.6160121
88
2.0200152
34 50.03
54.52597
2
Share is overvalued because current price of the share is $62.1.
Leasing and Valuation Lease Converter
The operational lease can be considered as of-the-balance financing and should therefore be
incorporated as debt. Using Damodaran’s valuation lease converter to process financial data found
in the 10-K annual report, we come to an adjusted operating income.
Pre-tax Cost of Debt =
2.61%
From the current financial statements, enter the
following
$
Reported Operating Income (EBIT) =
912.00
Reported Debt =
$
! This is the EBIT reported in the current
income statement
! This is the interest-bearing debt reported on

19. 2,174.00
$
170.00
Reported Interest Expenses =
Output
Number of years embedded in yr 6
estimate =
11
Converting Operating Leases into debt
Present
Year
Commitment
Value
$
$
1 95.00
92.58
$
$
2 85.00
80.73
$
$
3 100.00
92.56
$
$
4 67.00
60.44
$
$
5 100.00
87.91
$
$
6 and beyond
87.55
727.75
Debt Value of
$
leases =
1,141.97
Adjustment to Operating Income
+ Current year's operating lease expense =
- Depreciation on leased asset =
Adjusted Operating Income
the balance sheet
! I use the average lease expense over the first
five years
to estimate the number of years of expenses in
yr 6
! Commitment beyond year 6 converted into an annuity for
ten years
$1,410.00
$71.37
$1,338.63
New Firm Value:
Value of Firm
$
13,568
- Value of Debt
$
1,943
Value of Equity
Value of Equity per
Share
$
11,625
$
60.23

20. Options Strategy:
1.2
1
0.8
0.6
0.4
0.2
0
150
100
Strategy:
If we look at the share prices in last three months price is moving from 59 to 63. And as Starwood is
moving their head quarter to ME there are huge chances that price will shoot up. But it will take
some time.
So for the short term period price will move in same range so I would like to go for a Strangle i.e.
buying two calls but for different strike price.
Strike
Price
Premium
Buy HOT call May 2013
55
Sell HOT call May 2013
65
Amount
Investment
623
100
62300
439
200
87800
Total
150100
CALL
Buy
Sell
Premium
P
6.23
Strike Price
X
No. of call
Premium
P
4.39
55
Strike Price
X
65
1
No. of call
Total
1
Observatory
Prices
57
-4.23
4.39
0.16
59
-2.23
4.39
2.16

21. 60
-1.23
4.39
3.16
61
-0.23
4.39
4.16
62
0.77
4.39
5.16
63
1.77
4.39
6.16
64
2.77
4.39
7.16
65
3.77
4.39
8.16
Black-Scholes Model:
Using options with the following details in the Black-Scholes model, I came to the conclusion that the
call option, with exercise price of USD67.5 and maturity on 13 May 2013, is worth USD0 3 today.
However, the call option is priced USD 0.27 on the market which is very underpriced
Using the same logic, a put option with exercise price of USD 67.5 and maturity on 13 May 2013 is
worth USD 7.14 today which is priced on USD 6.65.
Stock Price
Exercise Price
Interest Rate
Dividend Yield
Time to Expiration
Standard Deviation
$
$
decimal
decimal
decimal
decimal
61.88
67.5
0.10
0.02
0.25
0.37
PROCESS
d1
d2
NORM d1
NORM d2
-0.2680617
-0.4535617
0.39432591
0.32507216
CALL
$
3.00
PUT
$
7.14
Leverage of Beta:
Unlevered Beta for the firm (based upon average debt/equity
ratio) =
Current Beta for the firm (based upon current debt/equity ratio)
1.07
1.51

22. =
Debt to Capital
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Debt/Equity Ratio
0.00%
11.11%
25.00%
42.86%
66.67%
100.00%
150.00%
233.33%
400.00%
900.00%
Beta
1.07
1.14
1.24
1.36
1.52
1.75
2.09
2.66
3.79
7.20
Effect of Leverage
0.00
0.08
0.17
0.29
0.45
0.68
1.02
1.59
2.73
6.14
Capital Structure:
Capital
Structure
Current MV of
Equity =
Market Value
of interestbearing debt =
# of Shares
Outstanding =
Debt Value of
Operating
leases (if any)
Risk Premium
=
$11,455
Financial Market
Current Beta for
Stock =
1.87
Current EBITDA =
$1,039
$2,062
Current Bond
Rating =
Baa2/BBB
Current
Depreciation =
$251
Current Tax Rate =
35.00%
193
$0
5.78%
Income Statement
Summary of Inputs
Long Term
Government Bond
Rate =
1.76%
Pre-tax cost of debt
=
19.08%
Current Capital
Spending=
Current Interest
Expense =
$362
$170
Looking at the adjusted value of the firm the value is getting increased till it reaches the point where
it starts decreasing again. It happens when Debt ratio is in between 50% to 60%.
Debt
Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
$ Debt
$0
$1,352
$2,703
$4,055
$5,407
$6,758
$8,110
$9,462
$10,81
Adjusted Present Value Estimates
Unlevered firm
Tax Benefits from Expected Bankruptcy
value
Debt
Cost
$12,879
$0
$2
$12,879
$187
$1
$12,879
$374
$1
$12,879
$561
$6
$12,879
$748
$8
$12,879
$935
$34
$12,879
$1,122
$515
$12,879
$1,309
$651
$12,879
$1,495
$1,045
Levered Firm
Value
$0
$4,663
$4,850
$5,032
$5,217
$5,378
$5,084
$5,135
$4,928

23. 90%
3
$12,16
5
$12,879
$1,682
$1,078
$5,082
Rating of the company changes as per below table:
Ratings comparison at current debt ratio
Current Interest coverage ratio =
4.64
Rating based upon coverage =
A3/AInterest rate based upon coverage
=
5.06%
Current rating for company =
Baa2/BBB
Current interest rate on debt =
19.08%
Current Bankruptcy Probability =
2.50%
The below table shows how the value of the firm changes and how the rating varies if it starts taking
more debt. Since WACC is the component of the after tax cost of debt and the cost of equity.
Generally cost of debt is less than cost of equity so that the weighting which we take decreases the
WACC initially until it reaches the optimal point then it shoots up. This increase is due to the loop
structure taken by the cost of debt calculation, which is the component of interest rate decided as
per company’s rating and the spread. With increase in debt both interest rates to borrow the money
and spread increases, which drops the rating of the company.
Debt
Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
$ Debt
$0
$1,352
$2,703
$4,055
$5,407
$6,758
$8,110
$9,462
$10,813
$12,165
Tax Rate
35.00%
40.00%
40.00%
40.00%
40.00%
40.00%
40.00%
40.00%
40.00%
40.00%
Unlevered Firm
Tax
Bond
Probability of
Value
Benefits
Rating
Default
$12,879
$0 AAA
0.07%
$12,879
$187 Aaa/AAA
0.07%
$12,879
$374 Aaa/AAA
0.07%
$12,879
$561 Aa2/AA
0.51%
$12,879
$748 A1/A+
0.60%
$12,879
$935 A3/A2.50%
$12,879
$1,122 Ba1/BB+
36.80%
$12,879
$1,309 B3/B45.00%
$12,879
$1,495 Ca2/CC
70.00%
$12,879
$1,682 Ca2/CC
70.00%
Expected
Value of
Bankruptcy Levered
Cost
Firm
$2
$12,877
$1
$4,663
$1
$4,850
$6
$5,032
$8
$5,217
$34
$5,378
$515
$5,084
$651
$5,135
$1,045
$4,928
$1,078
$5,082