Marriot Corporation Cost of Capital

2066 Words Jun 11th, 2012 9 Pages
1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single company-wide cost of capital for evaluating investment opportunities in each of its line of business, what do you think will happen to the company over time? 4. Briefly describe how each of the following events will likely impact Marriot’s cost of capital: (a) An increase in the long-term T-Bond rate by 2%. (b) Increased …show more content…
rates – 1,3% Rd = 7,925% + 1,3% = 9,225% Restaurants Floating Debt (25%) - 6,9% Fixed Debt (75%) - 8,72% Total debt = 25%*6,9% + 75%*8,72% = 8,265% Premium above Gov. rates – 1,3% Rd = 8,265% + 1,3% = 9,565% We assume that the fixed debt in the Lodging division would have a longer duration than that in the Restaurants division, hence we used 30- year Gov. bond rate for fixed debt in Lodging division and 10-year Gov. rate for fixed debt in Restaurants division. For the floating debt, we considered the 1-year Gov. rate applying to both Lodging and restaurants divisions. Furthermore, after taking the average of both floating and fixed debt rates for both divisions respectively we added the premium above Gov. Rate to the result and arrived at the pretax cost of debt. Cost of Equity - Lodging and Restaurant divisions Following the footsteps of the framework used in this analysis earlier, we would utilize the CAPM in order to calculate cost of equity for both Lodging and restaurant divisions. re = rf + β (MRP) For Restaurants division we’ll continue considering the risk free rate of 8.72%, based on the 10-year Gov. rate. For Lodging division we’ll consider the 30-year Gov. rate of 8.95% as the risk free rate. This approach would quantify the effect of duration differences between the investments in each division. We’ll consider the MRP (Market Risk Premium) of 7.43% based on the average spread between S&P 500 composite returns and long term US Gov. bond returns