We found the weighted average cost of capital for Marriott as a whole to be 9.68%. The divisions of Lodging, Contract Services and Restaurants had WACCs of 8.14%, 13.33%, and 9.63% respectively. The only variable between these divisions that remains consistent is the tax rate. Marriott has a target rate for each of the divisions’ capital structures, which affects their debt and equity betas. Also, there are stark differences between the betas in the segments, as well as the different assumptions a financial analyst must use when calculating risk-free and market rates for fixed and floating debt issuances.
In order to calculate the WACC, we first estimated the cost of debt using the specific guidelines and actual data given. We then used the cost of debt to calculate debt betas. These results were used to estimate unlevered equity betas for the three separate Marriott divisions, after which we were able to compute the four different WACCs by relevering the betas using the target debt-equity ratios and achieving new equity return benchmark rates. We also calculated unlevered returns and used these to estimate WACC. This yielded the same results.
Cost of Debt
The weighted average cost of capital (WACC) for Marriott and its divisions is calculated by using the relevant costs of debt and equity. As shown in table 1, Marriott has a target leverage rate of 60%, with 60% of its debt denominated in floating-rate securities, and 40% denominated in fixed-rate securities. Because of the time perspectives of each division, 8.95% (the 30-year T-bill return) was chosen as the risk-free rate for fixed-rate debt for Lodging, while 8.72% (the 10-year T-Bill Return) was chosen as the risk-free rate for fixed-rate debt for Restaurants and Contract Services. We chose a risk-free rate for the floating-rate debt of 5.46%, which was the most recent short-term Treasury bill return. We applied the debt-rate premium above government interest rates to all...