Marriott Corporation Case Study
1) The Marriott Corporation implemented for key elements into their financial strategy: manage rather than own hotel assets invest in projects that increase shareholder value, optimize the use of debt in the capital structure, and repurchase undervalued shares
2) Marriott uses WACC to measure the opportunity costs of capital of investments with similar risks. Each division of Marriott has a different cost of capital, based on debt capacity, debt cost, and equity cost. They use the estimate of cost of capital to determine the fraction of debt that should be floating rate debt. WACC is also used to determine the premium above government bond rates for their unsecured debt. This makes sense because the
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c) The debt cost should be different across the divisions because each division has its own risks. d) To calculate beta, we took the beta of assets of the company as a while and set that equal to the percentage of equity for each division and multiplied by the beta of equity for each respective division. 6) The cost of capital for contract services is 7.59%. We can estimate the equity cost by using the numbers provided in the case and calculating the beta for each division. (Appendix 3) Appendix 1. Cr = Rf + ß * (Rm – Rf) RE = 0.0458 +1.11 * (0.12. – 0.0458) Cost of Equity = 12.8277% WACC = (3,621.5/4,432.3) * (0.1025) * (1 – 0.34) + (810.8/4,432.3) * (0.12827) = 0.0552748 + 0.02354856 = 5.997% Appendix 2. Lodging RE = 2.518846 * (12.01 – 4.58) = 18.7150258 RD = 8.95 + 1.1 = 10.05 WACC = 0.74 * 0.1005 * (1 – 0.34) + (1 – 0.74) * 0.187150258 = 0.09774327 Restaurant RE = 1.129 * (12.01 - 4.58) = 8.38847 RD = 8.95 + 1.80 = 10.75 WACC = 0.42 * 0.1075 * (1 – 0.34) + (1 – 0.42) * 0.083847 = 0.07843026 Appendix 3. Contract Services RE = 1.0915 * (12.01 – 4.58) = 8.109845 RD = 8.95 + 1.40 = 10.35 WACC = 0.40 * 0.1035 * (1- 0.34) + (1 – 0.4) * 0.08109845 = 0.07598307 Beta Calculations: Lodging ßA = (1 – 0.41) * 1.11 = 0.6549 0.6549 = 0.26 * ßE => ßE = 2.518846 Contract Services ßA = (1 – 0.41) * 1.11 = 0.6549 0.6549 = 0.6 * ßE => ßE = 1.0915 Restaurant

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