# 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

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
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

## Related Documents

• ###### Marriott Corporation Essay

Harvard Business School 9-298-101 Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987, Marriott's sales grew by 24% and its return on equity stood…

Words: 4165 - Pages: 17
• ###### Essay on Hbs Case “Marriott Corporation: the Cost of Capital”

Marriott Corporation: Questions for HBS case “Marriott Corporation: The cost of capital” 1) Are the four components of Marriott's financial strategy consistent with its growth objective? In my opinion, the four components of Marriott's financial strategy are consistent with its growth objective. As we find in the case, the four components of Marriott's financial strategy: Manage rather than own hotel assets, Invest in projects that increase shareholder value, Optimize the use of debt…

Words: 1454 - Pages: 6
• ###### Marriott Corporation: the Cost of Capital (Abridged) Essay

Marriott Corporation: The Cost of Capital (Abridged) Executive Summary: The case &quot;Marriott Corporation: 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 for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates…

Words: 2519 - Pages: 11
• ###### Essay Weighted Average Cost of Capital and Marriott Corporation

dividend policy. Do you agree with Mr. Cowins’ proposal to pay a substantial dividend in December? Marriott Corporation (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…

Words: 1863 - Pages: 8
• ###### Marriott Case Analysis Essay

Marriott Corporation and Project Chariot The Marriott Corporation (MC), had seen a long, successful reign in the hospitality industry until the late 1980s. An economic downturn and the 1990 real estate crash resulted in MC owning newly developed hotel properties with no potential buyers in sight and a mound of debt. During the late 1980s, MC had promised in their annual reports to sell off some of their hotel properties and reduce their burden of debt. However, the company made little progress…

Words: 2635 - Pages: 11
• ###### Mariott Cost of Capital Essay

| | |Marriott Corporation: | |Cost of Capital | Concepts Covered…

Words: 2502 - Pages: 11
• ###### Marketing Essay

Marriott Corporation 02/11/15 BUS 590: Innovative Business Models for the ‘Next’ Economy Team A: Congying Ling | Devon Nobles | Sai Prashant Boy Reddy | Snehal Ramtekkar Introduction J.W. Marriot founded the Marriot Corporation (MC) in the year 1927. The main business of this corporation was developing hotel properties around the world and selling them to outside investors…

Words: 2116 - Pages: 9
• ###### Essay Case Study: Marriot Corporation : the Cost of Capital.

Marriot Corporation : the Cost of Capital. In front of Dan Chores is the issue of recommending three hurdle rates for each of Marriott Corporation's three divisions, which have significant effect on the firm's financial and operating strategies as well as its incentive compensation. Marriott Corporation had three major lines of business: lodging, contract services and restaurants. Also Marriott had its growth objective, to remain a premier growth company. The four components of…

Words: 1022 - Pages: 5
• ###### Essay Marriot vs Hyatt

Mission, Vision, Social Responsibility, Strategic Planning: Marriott and Hyatt Lori Scholl University of Maryland, University College Business Management 364, Section 4015 May 24, 2012 I. Mission and Vision Statements Mission Statement Organizing the direction of a business or corporation is essential because it can increase profitability and provide broad guidelines for how to accomplish the organization goals. This is where a mission statement becomes useful. A mission statement…

Words: 1739 - Pages: 7
• ###### Marriott Case Essay

QUESTION 1 Are the four components of Marriott´s financial strategy consistent with its growth objective? With regards to the overall strategy of primarily being a premier growth company, we analyze the 4 components as follows: 1. Manage rather than own hotel assets • Marriott developed the projects, established long term management contracts consisting of 3% of revenues and 20% of the profits. The assets were then sold to partners. Not owning hotels provided Marriot with greater liquidity…

Words: 655 - Pages: 3