Mariott Corporation Case Study

1886 WordsMar 8, 20078 Pages
Marriott 's corporation: the cost of capital What is the weighted average cost of capital for Marriott Corporation? Are the four components of Marriott 's financial strategy consistent with its growth objective? Marriott Corporation is an international company who 's the growth over the year has been more than satisfactory. In 1987, Marriott 's sales grew up by 24% and its return on equity stood at 22%. Moreover the sales and earnings pr share has doubled over the previous year. The company operates in three divisions: lodging, contract services and restaurants which represents 41%, 46% and 13% of sales in 1987 respectively. Marriott is determined to develop and to enhance its position in each division. This main goal…show more content…
To determine the opportunity cost of capital, Marriott required three inputs: debt capacity, debt cost, and equity cost consistent with the amount of debt. The cost of capital depends on each division. In fact the evaluation of the WACC is an appropriate tool to calculate the cost of capital for the corporation as a whole and for each division. The cost of equity One of the two major component of WACC is the cost of equity. The cost of equity model takes into account three values which we must calculate - a risk-free rate (rf), risk premium rate (expected market return - rf), and Beta Value. Before doing the calculations, we will justify our choices. We based it on the "Stocks, Bonds, Bills and Inflation" (SBBI). This workmanship is a standard reference source for business appraisers. It has been published annually since 1983. The beta value As it is said in the case, we already know the equity beta (0,97). But the capital structure (leverage) affects beta estimates. In order to eliminate the effect of leverage, we will calculate the asset beta, which reflects the sensitivity of the firm 's assets abstracting from capital structure. That is why we have to convert the equity beta into the asset beta. Then we can calculate the equity beta without the leverage effect. To calculate the asset beta, we need the current debt value. The ratio D/V for the company is set at 41% so we can find the ratio E/V is set at 59%. It comes from the exhibit 3 which

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