Marriott Corporation: The Cost of Capital
1. Marriott’s financial strategy includes managing rather than own hotel assets; investing on projects that increase shareholder value; optimizing the use of debt in the capital structure and repurchasing undervalued shares. Optimizing use of debt in Marriott’s capital structure affects company’s value; especially when the company wants to maximize shareholder’s value by having leveraged investment, borrowing money can be one of the ways. However, huge debt will increase the risk and the interest expense, using interest coverage ratio to determine whether Marriott can afford its interest on outstanding debt expense is more significant to measures its profitability and debt level. 2. a). We found the risk free rate from U.S. government Interest Rates in 1988, which is 8.72%(see Table B). And rate premium from spread between S&P 500 and longterm US bond returns, which is 7.43% (Exhibit 5). For beta, in order to eliminate the effect of leverage, we will calculate the asset beta(0.62) by using the equity beta given(1.11) and then calculate the equity beta(1.14) with leverage by using the Marriott’s target debt percentage(60%).Tax=44%, debt ratio=58.8%, debt/equity, ratio=1.43, (b)asset=1.11/[1+(1T)D/E]=0.62, (b)equity=0.62*[1+(1T)D’/E’]=1.14 Cost of Equity=8.72%+1.14*7.43%=17.19%
b). In order to calculate the cost of debt, we decided to use 10 year Government Interest Rates(8.72%) and Marriott overall debt rate premium above government(1.3%) to calculate rate of debt which could match on average the company profile. (Rd= 1.3%+8.72%=10.02%)
So the WACC=17.19%*40%+10.02%*(144%)*60%=10.24%
3. a). If Marriott uses single corporate cost of capital to evaluate investment opportunities, it would overestimate or underestimate the NPV of the project in different division, because each project or division has different risks. b). We use longterm statistic to calculate overall WACC; therefore, the shortterm debt for...
...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...
...Executive Summary
The case, MarriottCorporation: 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 MarriottCorporation, had to deal with making...
...HBR Case #1
MarriottCorporation: The Cost of Capital
Group 16—Tutorial Mon 11:30am
Group members
LIU Ying, Chloe  1155019350 
LUO Yingying, Irika  1155020931 
TIAN Tian, Sarah  1155019114 
WU Jiajie, Jesse  1155019061 
17 September 2012
Executive Summary
By 1987, MarriottCorporation had grown into a large multidimensional company with over $5 billion assets in lodging, contract...
...Marriott Case
1. What is the WACC for MarriottCorporation?
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...
...Case #3 “MarriottCorporation” The Cost of Capital”
What is the weighted average cost of capital for the MarriottCorporation 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...
...MarriottCorporation: The Cost of Capital (Abridged)
Are the four components of Marriot's financial strategy consistent with its growth objective?
Since its foundation in 1927 MarriottCorporation grew into one of the leading lodging and food services in the US. With three major business lines: lodging, contract services and related business, Marriott has the intention to remain a premier...
...1. How does Marriott use its estimate of its cost of capital? Does this make sense?
Marriott has defined a clear financial strategy containing four elements. To determine the cost of capital, which also acted as hurdle rate for investment decision, cost of capital estimates were generated from each of the three business divisions; lodging, contract services and restaurants. Each...
...MarriottCorporation: The Cost of Capital (Abridged)
Executive Summary: The case &quot;MarriottCorporation: 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...
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