Issue
In this assignment, we are asked to compute the WACC of Marriott Corporation and each of the company’s three divisions. Our approach is outlined in the next section. We made a series of assumptions regarding either the available data or the missing information. This has been explained below, in a separate section. Approach
We applied the following formulae to calculate the WACC:
Our assumptions are explained in the next section. The table below presents the approach for calculations at corporation level and division level according to each of the variables. Marriott’s capital structure comprises debt (fixed and floating) and equity.
Marriott CorporationBusiness Lines
1Beta of Debt (β¬¬d)Computed using correlation between S&P500 returns and HG Corp Bonds (recent history is implicitly more weighted), s.d. of the S&P500 and s.d. of the HG Corp Bonds (Exhibit 4)Same 2RiskFree RateEstimated to be equal to 10y US Gov Interest Rate as of April 1988 (Table B)Same 3Current LeverageUsing financial statements (Exhibit 1), we estimated the market value of debt and divided by market value of assets. Market value of debt is estimated to be equal to its book value. Market value of assets is equal to market value of debt + market value of equity (number of outstanding shares * price per share)N/A 4Market Risk PremiumFrom table of returns (Exhibit 5), taken as the average of spread between rates of return for S&P500 and LT US Gov Bonds, 192687Same 5Tax RateEstimated from data in exhibit 1, from ratio between income before tax and net income for year 1987Same 6Beta of Equity (βE), Unlevered βE Levered can be found in Exhibit 3 for the current debt load. Using the current leverage ratio (Step 3), we calculate the unlevered βE.Having found unlevered equity betas of comparables from their leverage ratio and levered βE (Exhibit 3), we averaged the unlevered βE to get the unlevered βE for each Marriott division. Restaurants division was...
...Marriott Corporation
Abstract
Marriott Corporation has three divisions – lodging, contract services and restaurants – with dissimilar operations. The company uses three separate hurdle rates for the three divisions to value the proposed projects. It is believed that this strategy is more appropriate that using a single firmwide discount rate because the operations of the three divisions differ drastically. However, the company has to ensure that the company uses an appropriate discount rate for each division. Therefore, we calculate the appropriate cost of capital for Marriott as well as for each of the three divisions. A detailed analysis is presented about the appropriate calculation inputs for each of the three divisions and various assumptions, made while performing the calculations, are justified.
1) Are the four components of Marriott's financial strategy consistent with its growth objective?
The first component of the strategy is to manage rather than own the hotel properties. This objective mitigates the investment needed to launch new hotels, as the general partner is not required to make significant investments. Although it may be argued that such a strategy could decrease the profit margins, the growth prospects are certainly easily achievable because of less limitation on the resources required. The second objective is an important characteristic of modern corporate finance. It believed that focusing on...
...mention in question 3, one single corporate cost can result in one division accepting an investment which will not result in profit, whilst another division might reject profitable opportunities.
Though is the WACC we calculated for the entire company not useless. Marriott might have interdivision projects that are difficult to place in just one of their main divisions. But it is important to take into consideration the different timeaspects and different ways to finance these investments, i.e. floating rate and debt vs. equity.
Finding the cost of capital for the lodging and restaurant divisions. WACC lodging = (1 – 0,44) * 0,74 * 9,025% + 0,26 * 17,05% = 8,173%
WACC restaurant = (1 – 0,44) * 0,42 * 10,065% + 0,58 * 16,744% = 12,21%
Determining the cost of debt for the lodging and restaurant divisions For the lodging division, which is financed by longterm debt, we use the 30year U.S. government rates to find the riskfree rate (table B), which is 8,95%, and according to table A, the spread for such an investment is 1,10%. rD for lodging division = 8,95% + 1,10% = 10,05%.
We think that the financing of the restaurant division is a bit different. Since we’re told that Marriott in a higher degree uses more shortterm debt to finance this division, we use only 10year interest rates, which, according to table B is 8,72%. The restaurantdivision has a significantly higher spread, which is 1,80%. rD for...
...Marriott Corporation:
Questions for HBScase “Marriott Corporation: The cost of capital”
1) Are the four components of Marriott's financial strategy consistent with its growth objective?
In my opinion, the four components of Marriott's financial strategy are consistent with its growth objective.
As we find in the case, the four components of Marriott's financial strategy: Manage rather than own hotel assets, Invest in projects that increase shareholder value, Optimize the use of debt in the capital structure, and Repurchase undervalued shares; are aligned with the growth objective. Marriott wants to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas, their goal is to be the preferred employer, the preferred provider, and the most profitable company.
2) How does Marriott use its estimate of its cost of capital? Does this make sense?
In the case is stated that Marriott required three inputs to determine the opportunity cost of capital: debt capacity, debt cost, and equity cost consistent with the amount of debt. The cost of capital varied across the three divisions because all three of the costofcapital inputs could differ for each division. This is the most logical approach due...
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Marriott Corporation
The Cost of Capital
Author
Student Number
董晖
林桐
吴正浩
祝承懿
Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University
Table of Contents
Background
The hurdle rate is the required return or opportunity cost of each division and company. Only project with positive NPV discounted by hurdle rate will be invested, and the total return of Marriott up to all projects invested. Though there are many subjective aspects in estimation of WACC, common view and accepted formula will be adopted to calculate WACC, discretion if prudent used.
Key factors
1. Key factors of debt
a) Tax rate
Tax rate is based on state policy and net income of the company. Since tax rate of 1988 is not expected to change, tax rate of 1987 is the best estimation of rate of 1988, will be 44.10%.
b) Bench mark bond
Lodging division uses long term debt for debt, and based on going concern, 30year bond rate is selected as bench mark, which is 8.95%。
Contract services division and restaurant division uses shortterm debt rate, that is 1year U.S. Government rate equals to 6.9%, also taken as risk free rate.
c) Bond rate of division and Marriott
As there are both floating and fixed rate bonds among divisions and Marriott, the bond rate can be calculated as
Bond rate of Division or Company =
Fraction of Debt at Floating *(Bench Mark Rate +Premium)
+ Fraction of Debt at...
...Executive Summary
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 riskfree 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 debtequity 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...
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MarriottCase 
Cost of Capital 

Facts:
Dan Cohrs is preparing the annual hurdle rates for the three divisions of Marriot Corporation (Lodging, Contracts, and Restaurants) which will have a significant impact on the firm’s financial and operating strategies. Marriott’s has been truthful to its operating strategy to remain a premier growth company, Marriott’s sales and earnings per share have doubled over the last four years. In 1987 Marriot’s sales rose 24%, the return on equity was 22% and profits were $223 million. Lodging consisted of 51% of Marriott’s profits, while contracts services and restaurants amounted to 33% and 16% respectively. However, the sales mix is not proportionate to relative profits, where 41% of sales are generated from lodging, 46% from contract services and 13% from restaurants. One of the main factors in Marriot’s lodging success has been their strategy to syndicate hotels to limited partners with a three percent management fee and 20% of profits before depreciation and debt service. One of Marriot’s key strategic elements is to optimize the use of debt in the capital structure for which it uses an interest coverage target instead of debt to equity ratio to determine the ideal amount of debt to hold.
Problems:
In order to calculate the WACC (hurdle rate) for each division, many different variables need to be analyzed in detail so that the WACC is a good evaluator of the profitability of...
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Marriott Corporation

Introduction
Founded in 1927, Marriott Corporation has become one of the leading food service companies in the United States. As of 1987, Marriott recorded a profit of $233 million on sales of $6.5 billion and retained a high sales growth rate of 24%. Marriott runs on three major lines of business lodging, contract services, and restaurants. Lodging division which includes 361 hotels generated 41% of 1987 sales and 51% profits. Contract services division which provides food and services management generated 46% of 1987 sales and 33% of profits. Lastly, the restaurant division generated 13% of 1987 sales and 16% of profits.
Marriott had been successful with its financial strategy which focused on the four key elements. First, Marriott managed the hotel assets rather than owning them. Marriott sold the hotel assets to limited partners while still retaining operating control under the longterm management contract. Second, Marriott invested in projects that increased shareholder value. The company used discount cash flow techniques to evaluate projects that could be profitable. Third, Marriott optimized the use of debt in the capital structure. The company determined the optimal amount of debt based on its ability to service the debt. As of 1987,...