Marriott Corporation Essay

3019 Words Oct 5th, 2011 13 Pages
Marriott Corporation: The Cost of Capital
Simrith Sidhu, Amy-Jane Miocevich, Jacques Rousset, Jing Tao

Task One:

Marriott uses the Weighted Average Cost of Capital (WACC) to measure the opportunity cost for investments. WACC is calculated using the 1987 financial data provided in the Marriot Corporation: The Cost of Capital (Abridged) case study and estimators.
WACC = Cost of Equity x (Equity/Debt +Equity) + Cost of Debt x (Debt/(Debt + Equity)) x (1 – Tax Rate)
This method is applied for Marriott as a whole and its three divisions (lodging, contract services and restaurants). Marriott uses their WACC’s to discount appropriate cash flows by the appropriate and related divisional hurdle rate. This allows them to calculate the Net
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This allows us to calculate an unlevered beta of 0.5141 and a levered beta of 1.4797. (see appendix 1.10)

In order to calculate WACC, we estimate risk free rate for debt and equity and the market risk premium to be the same as Marriott’s as a whole. This is because the lodging assets had long useful lives. We also wanted to be consistent with using arithmetic averages. The Debt rate premium above government for lodging is given in table A of the case study. We calculated Return on Equity to be 18.07% and debt 10.25% (see appendix 1.11)

Therefore, from these estimates, we can calculate 8.88% for Marriott’s lodging division WACC as WACC = Cost of Equity x (Equity/Debt +Equity) + Cost of Debt x (Debt/(Debt + Equity)) x (1 – Tax Rate) = 18.07% x 0.26 + 10.05% x 0.74 x (1 – 0.34) = 8.88%

Calculating Marriott’s Restaurant Division WACC:

Calculating the restaurant division’s WACC uses the same steps as we used when calculating the lodging division WACC, however, we use different estimators for return of equity and debt. Firstly, for each restaurant chain, we weight the equity beta to its 1987 revenue. This is shown in appendix 1.3 and is done to provide an accurate equity beta when calculating the unlevered beta. The average weighted equity beta summed together gives an equity beta for the restaurant

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