Hbs Case “Marriott Corporation: the Cost of Capital”

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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 in the capital structure, and Repurchase undervalued shares; are aligned with the growth objective. Marriott wants to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of
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Risk Premium Restaurants’ division
• Spread between S&P 500 Composite returns and short-term U.S. Treasury bill returns: between 1926-87 (8.47%)
• Is a short-term investment, and I used a 1 year Maturity U.S. Government Interest Rate as the risk free rate.

b) How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why?

I calculated each division’s cost of debt adding the division’s debt rate premium above government to the U.S. Government Interest Rates that best represented the divisions behave.

Risk free rate Lodging division
• 30 years Maturity U.S. Government Interest Rate (8.95%)

Risk free rate Restaurants’ division
• 1 year Maturity U.S. Government Interest Rate (6.90%)

The debt cost should differ across divisions because each one operate as independent business with different behavior.

c) How did you measure the beta of each division?

In order to measure the beta of each division, I got the average Asset Beta of the companies that where more similar to the division, and I leverage it with the capital structure of the particular division.

7) What is the cost of capital for Marriott's contract services division? How can you estimate its equity cost of capital without publicly traded comparable companies?

In order to calculate the cost of capital for the contract service division I will use most of the formulas

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