Finding Marriott’s WACC To calculate the WACC we need to identify the different factors included in the WACC-method, to be able to measure the opportunity cost for investments. First we need to identify the debt, equity and the firm value, which is equity plus debt. Then we identify the debt cost (rD), which is a pre-tax cost, and then we need to identify the cost of equity (rE). As we can observe in table A, the debt percentage in capital is 60 %, which implies that the equity is 40 %. By dividing the income taxes by the company’s income before taxes, we find that t = 175,9 / 398,9 = 0,44 To find the risk-free rate, we chose to use the arithmetic average on long-term U.S. government bond returns for the longest time period (1926-1987), 4,58%. We chose this because it’s the most precise estimator, and the years 1981-1987 have been highly unstable, making it difficult to estimate an average. To be consistent, we used the long-term spread between S&P Composite returns and long-term U.S. government bond returns, 7,43%, which is the arithmetic average over the years 1927-1987. Although the last years have been unstable, the number is very close to the spread in 1987. For the entire company, we use the equity beta mentioned in Exhibit 3, beta equity 1,11. rE = rF + b * MP
Calculating the cost of debt, rD: To keep things simple, and because of the fact that the company uses a combination of both long-term and short-term bonds to finance their investments, we have chosen to use the 10-year U.S. government interest rate and Marriott’s debt rate premium above government for the whole division to find the cost of debt. (Tables A & B) rD = 8,72% + 1,3% = 10,02%
This implies that Marriott’s WACC is:
Investments using Marriott’s WACC The WACC we have calculated will preferably suit inter-divisional projects, due to the fact that this WACC is not applicable on every individual division. It’s important to considerate the factors we have...