1. Formula for cost of capital:
WACC = wdrd(1T) + wpsrps + wsrs
The cost of capital is important to calculate for any company that is making a decision on accepting or rejecting a project. If the expected rate of return on a project exceeds the calculated cost of capital, then the company should move forward with the project. The cost of capital is particularly important for Encana because they are expecting to grow in size. Calculating the WACC will be necessary for use in their capital budgeting plan. 2. After tax cost of debt:
Using the market value approach, the first step will be to determine the required rate of return debt holders require. As mentioned, the cost of capital is used in capital budgeting so I used only long term debt for calculating WACC. Also, the YTM that current bondholders expect is given, which can be a good estimate as to what the new bondholders will require: rd = 5.81%
Tax rate = income tax expense / E.B.T. = 1,260/4,089= 30.81% After tax cost of debt = rd (1T) = 5.81 (130.81%) = 4.02% 3. Cost of preferred stock:
It was mentioned in the text that “Encana has no preferred shares outstanding”. So calculating this portion of WACC is not necessary. 4. Cost of Equity:
Using the CAPM approach, the first thing to do is estimate the risk free rate. We can use the long term treasury bonds to do this:rRF = 4.2% It will now be necessary to estimate the current market risk premium. I used the S&P arithmetic average return in Exhibit 5 minus the risk free rate (RPm= rm r*) 13.9 – 4.2 = 9.7% The stock Beta is given: 1.27
Rs= rRF + (RPm) Beta=4.2% + (9.7%) * 1.7=16.52%
DCF Approach:
Calculate g using retention growth model:
G = ROE (retention ratio) & retention ratio = 1 Payout ratio Year Closing Price EPS DPS Payout ROE  2002 23.88 1.44 0.2 0.1389 0.0603 ...
...is the WACC for Marriott Corporation?
Cost of Debt
Tax Rate
We determined this number by taking income taxes paid/EBITDA = 175.9/398.9 = 44.1%
Return on debt
There are two clear components of debt: fixed and floating.
In order to get the fixed debt rate we took the interest rates on fixedrate government securities and added the premium above the government rate.
The floating aspect is priced into the premium above the government rate.
We used the 30year maturity for the cost of debt on Marriott Corp and the Lodging division. We did this because both the Lodging division’s assets and the company have long useful lives.
We used a 10year maturity for the cost of debt on the Restaurant division. We did this because the useful life of the assets in a restaurant are not as longterm as those in Lodging, but are also not extremely shortterm.
We used a 1year maturity for the cost of debt on the Contract Services division. We did this because the useful life of the assets in this division is very short.
COST OF DEBT     
Fixedrate US Government Securities  
Maturity  Rate     
30 year  8.95%     
10 year  8.72%     
1 year  6.90%     
   ...
...Marriott Corporation: The Cost of Capital
Introduction
Dan Cohrs of Marriott Corporation has the important task of determining correct hurdle rates for the
entire corporation as well as each individual business segment. These rates are instrumental in determining
which future projects to pursue and thus fundamentally important for Marriott’s growth trajectory. This case
analysis seeks to examine Marriott’s financial strategy in comparison with its growth goals as well as evaluate a
detailed breakdown of Marriott’s cost of capital – both divisionally and as a whole.
Financial Strategy and Growth
Marriot’s current financial strategy is in line with its overall goal of steady growth. By building and then
promptly selling their hotels to limited partners, the company recoups its costs almost immediately. They then
run the hotels, taking a 20% cut of the profits in addition to a 3% management fee. This results in fast, stable
returns, which is good for continued growth. They may run into issues with overexpansion in the future, but for
the time being, their strategy is sound.
The other elements of Marriott’s financial strategy are also in line with their overall goals. By seeking
projects that would increase shareholder value and repurchasing undervalued shares, they ensure that the
value of their equity does not decrease. When coupled with the use of...
...1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single companywide cost of capital for evaluating investment opportunities in each of its line of business, what do you think will happen to the company over time? 4. Briefly describe how each of the following events will likely impact Marriot’s cost of capital: (a) An increase in the longterm TBond rate by 2%. (b) Increased competition in the restaurant business. (c) A mild recession that causes companies to cut back on their overall travel and business expense budgets.
Marriot Corporation: Cost of Capital
Question 1
The cost of capital is computed using Weighted Average Cost of Capital (WACC) technique which is the weighted average of cost of equity and cost of debt of the firm. The cost of debt is the current borrowing rate at the time of the analysis...
...1.
Marriott uses its' cost of capital estimates to create a hurdle rate to effectively run operations. Marriott uses these estimates to operate its four financial strategies. These are managing rather then owning hotel assets, investing in projects that increase shareholder value, optimizing the use of debt in the capital structure and repurchasing undervalued shares. If the company uses its overall WACC it may have divisions accept projects with returns below their respective WACC which will result in losses and vice versa.
2.
The Weighted Average Cost of Capital (WACC) is as average that reflects the expected return on all of a companies securities. For the WACC of Marriott as a whole represents tall of Marriott's divisions as one company. Marriott's divisions are lodging, restaurant and contract services. To calculate the WACC a risk free rate was used of 8.72% reflecting the interest rate on 10 year government bonds. A risk premium of 7.76% or the average returns of arithmetic averages of all long term, high grade corporate bonds was used for the WACC. To unlever the equity beta of 1.11 for Marriott the current debt percentage of 41% was used as shown in their capital structure. The relevered beta was calculated using 60% debt from the target capital structure. Cost of debt was calculated by multiplying the cost of fixed rate debt by fraction...
...Case #3 “Marriott Corporation” The Cost of Capital”
What is the weighted average cost of capital for the Marriott Corporation and cost of capital for each of its divisions?
– What riskfree rate and risk premium did you use to calculate the cost of equity?
– How did you measure the cost of debt?
– How did you measure the beta for each division?
Solution
What riskfree rate and risk premium did you use to calculate the cost of equity?
– Riskfree rate proxy
The riskfree rate is determined using the yields of U.S. Treasury securities, which are riskfree from default risk. U.S. Treasuries are subject to interest rate risk, therefore, the selected maturity should correspond to an investment horizon[1].
– Investment horizon
According to the costofcapital calculation methodology used by Marriott Corporation, lodging division was treated as longterm, while restaurant and contract services divisions were treated as shortterm because those assets had shorter useful lives.
– Expected return proxy
Arithmetic average return is more suitable than geometric mean as it is better in estimating an investment’s expected return over a future horizon based on its past performance (geometric mean is a better description of longterm historical performance...
...FIN – 502, dR. GEORGE gALLINGER 
Case Analysis – Marriott 
Detailed  Individual Assignment 

Ankur Sharma 
Evening Accelerated MBA  T/Th – Class of 2011 
W P Carey School of Business, Arizona State University 
The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is assessed separately.
Marriott's growth objective Vs financial strategy
Marriot’s growth objective is to be the preferred employer, preferred provider and the most profitable company within the chosen line of businesses – lodging, contract services and related businesses. (P145)
The first financial strategy of “managing rather than owing assets” is very consistent with Marriott’s growth objective. By selling the hotel assets, Marriot compliments its ROA (return on assets) thereby increasing potential profitability and its financial position in the market which indirectly reduces the risk of investment in the firm. Although, there is some business risk associated with this strategy as Marriott invests in the acquisition and development of these assets. There may exists barrier’s to exit if the real estate prices fall and Marriot incurs looses on the sale rather than proceeds. Also, once the ownership of the asset is transferred, buyer power...
...Executive Summary
The case, Marriott Corporation: The Cost of Capital (Abridged), concentrates on making decisions based on capital asset pricing model (CAPM) and the weighted average cost of capital (WACC) to measure the opportunity cost for investments. Dan Cohrs, the Vice President of Finance of Marriott Corporation, had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging, restaurant and contract services. In calculating rates, he had to face two major problems. First, he has to decide if it’s better to use one hurdle rate for all divisions or use multiple hurdle rates for each respective division. In addition to calculating hurdle rate, he had to choose the dataset best suited for each division – future, present and past numbers, or short term and long term rates. An example of this would be that the long term rate is used for calculating hurdle rate for Marriott Corporations and lodging, while short term rate is used for calculating hurdle rate for restaurant and contract services. Although the company has a significant amount of data and information for other divisions, the second concern is that it has limited data and information for contract services. This made it difficult to calculate the weighted average cost of capital. In...
...Marriott Corporation: The Cost of Capital (Abridged)
Executive Summary: The case &quot;Marriott Corporation: The Cost of Capital (Abridged)&quot; focuses on an ideal opportunity to review the capital asset pricing model and the weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate riskless rate and market risk premium; the choice of time period to estimate expected returns and the difference between the geometric and the arithmetic average as a measure of expected returns.
SYNOPSIS
Marriott Corporation began in 1927, and over the next 60 years, the company grew into one of the leading lodging and food service companies in the US. In 1987, the Marriott's annual report stated, &quot;We intend to remain a premier growth company. Our goal is to be the preferred employer and provider, and the most profitable company&quot;. Marriott's profits were $223 million on sales of $6.5 billion.
In April 1988, vice president of project finance at the...