Marriott Case

Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.

3) Ameritrade has a short history of trading, so its equity beta cannot be computed precisely using its own historical data. Exhibit 4 provides some choices for comparable firms. Which of these firms do you think are appropriate to use as comparables to determine the beta of Ameritrade’s planned advertising and technology investments? Why?

A correct response requires that you find an appropriate industry beta and measure for levered/unlevered betas and requires that you define cost of equity capital and free cash flow (FCF) – you may need a formula for FCF.

The historical beta comes from historical data. This kind of beta would slope coefficient in a regression, and associated with company's stock returns and market returns. This approach is conceptually straightforward, and complications quickly arise in practice.

* Stock Beta: Exhibit 5 shows a detailed measurement of the company’s stock returns in relation to the rest of the market through 5-year historical price and index data. The analysis includes monthly returns of both the NYSE and the S&P 500 index in order to capture a comprehensive view of the market return. In each comparison, the monthly returns of the Target stock and market are plotted on Y-axis and X-axis respectively to get the regression line’s slope or beta. The analysis arrives at an average beta of 0.988 which indicates a similar movement of Target stock’s returns in comparison to the whole market over time.

Marriott continued to position itself to take advantage of various opportunities in the future by formalizing its diversity strategy and expanding its operations internationally. The company promotes the recruitment, retention, and advancement of women and minority employees, and initiated efforts to develop an increasingly diverse owner, guest, and supplier base. As Marriott aims to continue to grow and expand globally, it will be even more imperative that the company understand the climate in which it operates so that it can properly apply the proper financial structure to promote and sustain its long-term growth.

In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.

in which wd is the proportion of Southwest’s assets financed by debt, ws is the proportion of Southwest’s assets financed by equity, rd is the required return on debt, rs is the required return on equity, and T is Southwest’s marginal tax rate.

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

Lastly, the interest rate was calculated by dividing interest expense by long-term debt for the company. These numbers, along with equity and debt data given to us in the case, resulted in a WACC of 13.89%.

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

Since its foundation in 1927 Marriott Corporation grew into one of the leading lodging and food services in the US. With three major business lines: lodging, contract services and related business, Marriott has the intention to remain a premier growth company. To achieve this goal the corporation’s strategy is to develop aggressively appropriate opportunities within their business lines. Marriott would like to be the preferred employer, the preferred provider and the most profitable company in each of the operating areas. The financial strategy includes four key elements:

Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

➢ How was cost of debt measured of each division? Should the cost of debt differ across three divisions? Why?

Beta: Companies in the same industries usually have different betas, one of the reasons this can happen is the kind of financing or debt equity ratio. The higher the debt equity ratio the higher the beta: this shows why company N has a higher beta compared to company M that has a lower debt equity ratio.