Case Questions
Case #5 – Marriott Corporation: The Cost of Capital

1.Are the four components of Marriott’s financial strategy consistent with its growth objective?

2.How does Marriott use its estimate of its cost of capital? Does this make sense?

3.What is the weighted average cost of capital for Marriott Corporation? a.What risk free rate and risk premium did you use to calculate the cost of equity? b.How did you measure Marriott’s cost of debt?

4.If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?

5.What is the cost of capital for the lodging and restaurant divisions of Marriott? a.What risk free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? b.How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? c.How did you measure the beta of each division?

Case Hints and Suggestions

The primary objective of this case is to show students how the CAPM is used to compute the cost of capital. Students learn to calculate beta based on comparable companies and to lever betas to adjust for capital structure. Students are asked to determine the appropriate risk-less rate and market risk premium. This case also encourages students to focus on 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.

The cost of capital for Marriott as a whole

The case provides 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.

To calculate the WACC you will need information on the cost and amount of debt and the cost and amount of equity. Information on the amount and cost of debt is given in...

...ON CHAPTER 15 (COST OF CAPITAL)
1.) The Wind Rider Company has just issued a dividend of $2.10 per share on its common stock. The company is expected to maintain a constant 7% growth rate on its dividends indefinitely. If the stock sells for $40 a share, what is the company’s cost of equity?
2.) The Ball Corporation’s common stock has a beta of 1.15. If the risk free rate is 5% and the expected return on the market is 12%, what is Ball...

...What is cost of capital?
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
Importance
The concept of cost of capital is a...

...Cost of Capital
Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The...

...ogCost of capital
First of all I would like to say the I wanted to calculate the cost of debt and cost of equity but the information given in the statements are missing the items needed to calculate the cost of debt and the cost of equity but I would like to analyze the information related to this part
The market capitalization already increased in year 2010to 7,016 million from the previous year which was 3,805 million...

...WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER
1) From the SEC website, the balance sheet of Dell Computer reveals a
Book value of debt = $3,394,000,000 and
Book value of equity = $4,625,000,000
The same balance shows the breakdown of the long-term debt (book values) in table 1.
Table 1
Coupon Rate
(%) Maturity Book Value
(Face Value in million $)
3.38 06/15/2012 400
4.70 04/15/2013 599
5.63 04/15/2014 500
5.65 04/15/2018 499
5.88...

...What’s your real cost of capital?
By James J. McNulty, Tony D. Yeh, William s. Schulze, and Michael H. Lubatkin
Harvard Business Review, October 2002
Issue of the article: valuing investment projects
Number of pages: 12
Daniel Miravet Campos
Part 1. Executive summary
This article is fundamentally based on the exposition of a new method to calculate the cost of capital for a company (MCPM), to meet the inefficiencies of the...

...Cost of Capital
Firms need to make capital investment i.e., purchasing fixed assets such as factories, machineries, equipment, etc. After deciding what capital investments to make, they need to decide on the financing – sources of capital. The sources: Long-Term Debt, Common Stock, Preferred Stock and Retained Earnings. Then they need to find the cost of obtaining each source of financing today (not...

...WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are...

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