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Marriott Corporation: the Cost of Capital

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Marriott Corporation: the Cost of Capital
Case 1- Marriott Corporation: The Cost of Capital

Some preliminary questions:

1. What do you think about Marriott’s policy of repurchasing shares?

Repurchase whenever stock price < warranted equity value

Does this mean the market is inefficient?

2. Why does Marriott manage rather than own hotel assets?

Finding limited partners on a hotel project is equivalent to selling private equity in the project

Is there any reason to expect the private equity market to work better/worse than the public equity market?

The main questions:

A. What is Marriott’s cost of capital?

B. What is Marriott’s cost of capital for lodging? for restaurants? for contract services

Question #1- Marriott’s WACC

Basic steps:

1. Identify (equity at the target debt-equity ratio

2. Identify appropriate estimate of risk-free rate rf

B. C. 3. Identify appropriate estimate of market risk premium (rm – rf)

D. 4. Use CAPM to estimate requity

E. 5. Identify appropriate measure of rdebt

F. 6. Use formula: rWACC = (1-TC)[D/(D+E)]rdebt + [E/(D+E)]requity

1. Identify (equity at the target debt-equity ratio

Note that (equity at current debt-equity ratio is estimated at 1.11

Current debt value is $2498.8 million

Current equity value is ($30 x 118.8 mil. shares) = $3564 million

Current D/E ratio is 2498.8/3564 = .70

Target D/(D+E) ratio = 60% ( Target D/E ratio = 1.5

Use formula from class notes:

(equity at current ratio = [1 + (1-TC)Debt/Equity](unlevered

( 1.11 = [1 + .66 x .70](unlevered

( .759 = (unlevered

← (equity at target ratio = [1 + .66 x 1.5] x .759

← (equity at target ratio = 1.51

2.

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