Mariott Corporation Case Study

Hotels (35% of sales)—Marriott Hotels was one of the world's leading and most successful operators

Free Cash Flow = Sales Revenues – Operating Costs and Taxes – Required Investments in Operating Capital. Weighted Average Cost of Capital (WACC) is affected by market interest rates, market risk aversion, cost of debt, cost of equity, firm’s debt/equity mix, and firm’s business risk. Therefore, free cash flows and the weighted average cost of capital interact to determine a firm’s value by the following equation:

The firm’s use of WACC is directed towards analysis of the company’s future capital investments. Specifically, firms use it as a discount rate in determining a projects profitability versus the cost of taking it on. A firm-wide WACC is a beneficial tool for determining whether a

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

n. WACC has market interest rates and market risk aversion, firms debt/equity mix and firm’s business risk which all go to cost of debt and cost of equity which both areas end up at the value.

WACC is used to value the entire firm, it used as a starting point to determine the discount rate for project investments. In addition, the WACC is the appropriate rate to use when evaluating the firm performance to determine if the firm has created value for its shareholders.

In estimating the weighted average cost of capital, we used the cost of equity of 11.63% and the cost of debt of 2.25%. We calculated the weight of debt to be 2% and the weight of equity to be 98%. For the weight of debt we divided debt by the sum of debt and equity, and for the weight of equity we divided equity by the sum of debt and equity. Our estimated Company’s cost of capital is 11.44%, or 12%. The calculations for the cost of capital are shown in Appendix E.

1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method?

There are many factors that businesses have to include when calculating WACC, common stock, preferred stock, bonds and long-term debt. The cost of capital for businesses has been very low because of the low interest rate policy by the feds; WACC impacts the value of corporations (Mewes, 2015). The formula to calculate the Weighted Average Capital is:

When we calculate those number, we need to know the equity and debt of the company which can easily find on yahoo finance. The cost of debt and the corporate tax rate that we calculated are also based on the data from yahoo finance. We made Beta for the companies with 10 year ranges and use it to calculate return of equity. After we got those number, we can calculate the WACC.

WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing:

The WACC is great for evaluating the cost of capital for a business, so they can determine if the financing will benefit their business growth and cash flow. For real estate investing the asset will be sold and the goal is to maximize the return on the investment and WACC is only the cost of capital and does not account for the rate of return on an investment or the increase in property value and the ultimate sale of the property sale at the higher price.

1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock.

The relationship between beta and operating leverage has consequences for the firm's major strategic decisions regarding future direction. It may not be an easy task to determine the operating leverage especially when viewed from outside, this is because the fixed and variable costs are often aggregated in income statements. It is possible to obtain the approximate measure of the firm's operating leverage, however by looking at changes in operating income as a function of changes in sales.