Calculating Wacc for Marriot

Calculating WACC for Marriot

Marriot has three divisions :

* Lodging * Restaurant * Contract services

Financial Strategy of Marriott

* Manage rather than own hotel assets * Invest in projects that increase shareholder value * Optimize the use of debt in the capital structure * Repurchase undervalued sharesunlevered

Unlevered Asset Beta

Asset beta = (E/V) * Equity betaE = Market value of equity
V = Market value of company = Market value of equity + Market value of Debt

* Levered equity beta = 0.97 * Market leverage = 0.41 * Unlevered asset beta = (1-0.41)*0.97 = 0.57 * Target debt/value = 0.60 * Levered equity beta = 0.57/(1-0.60) = 1.43

* Keq = Rf + beta *Risk premium = 8.95 + 1.43 * 7.43 = 19.57% * Kdebt = 8.95 + 1.30 = 10.25% * WACC = 0.4*19.57+0.6*10.25*(1-0.34) = 11.89%

Asset Beta for Lodging Leverage Eq. Beta Asset Beta
Hilton 0.76 0.14 0.88
Holiday 0.79 1.46 0.31
La Quinta 0.69 0.38 0.12
Ramada 0.65 0.95 0.34

Average asset beta = 0.38

WACC for Lodging Division

* Unlevered asset beta = 0.38 * Target debt/value = 0.74 * Levered equity beta = 0.38/(1-0.74) = 1.46 * Keq = Rf + beta *Risk premium = 8.95 + 1.46 * 7.43 = 19.80% * Kdebt = 8.95 + 1.10 = 10.05% * WACC = 0.26*19.80+0.74*10.05*(1-0.34) = 10.06%

Asset Beta for Restaurant Division

leverage Eq. Beta Asset Beta
CFC 0.04 0.75