Marriott Corporation Cost of Capital
Executive Summary
The case, Marriott Corporation: 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 Marriott Corporation, had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging, restaurant and contract services. In calculating rates, he had to face two major problems. First, he has to decide if it’s better to use one hurdle rate for all divisions or use multiple hurdle rates for each respective division. In addition to calculating hurdle rate, he had to choose the dataset best suited for each division – future, present and past numbers, or short term and long term rates. An example of this would be that the long term rate is used for calculating hurdle rate for Marriott Corporations and lodging, while short term rate is used for calculating hurdle rate for restaurant and contract services. Although the company has a significant amount of data and information for other divisions, the second concern is that it has limited data and information for contract services. This made it difficult to calculate the weighted average cost of capital. In addition to that, there was limited information about Marriot’s competitors. This information has to be used to determine the target leverage and with the lack of data, it has an impact on calculating for beta.
For this case, we show how to estimate beta based on competitive companies and to use these betas to adjust for capital structure, ultimately calculating the WACC. We also have to choose the appropriate market risk premium and risk free rate. Furthermore, choosing the suitable time period to estimate expected returns and the difference between the geometric and the arithmetic average, is a major part of this case because it will significantly affect
The case, Marriott Corporation: 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 Marriott Corporation, had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging, restaurant and contract services. In calculating rates, he had to face two major problems. First, he has to decide if it’s better to use one hurdle rate for all divisions or use multiple hurdle rates for each respective division. In addition to calculating hurdle rate, he had to choose the dataset best suited for each division – future, present and past numbers, or short term and long term rates. An example of this would be that the long term rate is used for calculating hurdle rate for Marriott Corporations and lodging, while short term rate is used for calculating hurdle rate for restaurant and contract services. Although the company has a significant amount of data and information for other divisions, the second concern is that it has limited data and information for contract services. This made it difficult to calculate the weighted average cost of capital. In addition to that, there was limited information about Marriot’s competitors. This information has to be used to determine the target leverage and with the lack of data, it has an impact on calculating for beta.
For this case, we show how to estimate beta based on competitive companies and to use these betas to adjust for capital structure, ultimately calculating the WACC. We also have to choose the appropriate market risk premium and risk free rate. Furthermore, choosing the suitable time period to estimate expected returns and the difference between the geometric and the arithmetic average, is a major part of this case because it will significantly affect