Marriot Corporation: the Cost of Capital

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Executive Summary

Marriott Corporation which is one of the large corporations in managing hotels and other support services such as restaurants and contract services has business goals to remain a significant growth in the company by setting consistent business strategies which are consistent with its goals and developing appropriate investment opportunities in different business sections.
To support Marriott 's growth objectives of making profit to the company, preferring employers, and preferring providers, it created four components of Marriott 's financial strategy which are:
• Manage rather than own hotels assets
• Invest in projects that increase shareholder value
• Optimize the use of debt in the capital structure
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Furthermore, are Marriott 's financial strategies consistent with its growth objective?

Methodology or Techniques

To analyze the key for investing in projects, Marriott Corporation has to evaluate the hurdle rate for total firm operations as well as hurdles rate of each division by calculating the cost of capital by using the Weighted Average Cost of Capital (WACC). To calculate this value, Marriott has to evaluate the market of debt and equity, pretax cost of debt, after-tax cost of equity, value of the firm and the corporate tax rate. Moreover, evaluating the correlation and effects of Marriott 's 4 financial strategies in line with its objective of remaining a premier growth company will illustrate the significance of these strategies.

Data Requirement or Sources

From the formula WACC = (1-T)r-D(D/V)+r-E(E/V), we will get
• T from (Income taxes / Income before income taxes) in exhibit 1
• r-D from U.S government interest rates in April 1988 in table B plus Debt rate premium above government in table A
• (D/V) from Debt percentage in capital in table A
• r-E from formula = rf+B(rpre)
1. rf from U.S government interest rates in April 1988 in table B
2. B from assumption by using information of not only Marriott 's revenues and operation data but also Information on Comparable hotel and restaurant companies which includes arithmetic average return, equity beta, market leverage, and 1987 revenues
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