Marriott Corporation Case Study: the Cost of Capital Essay

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Financial Decision Analysis~Marriott Corporation Case Study

Executive Summary – Q5 – Hurdle Rate Analysis
Hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within Marriott Corporations due to their unique industry risk levels and capital structures. They use this number to determine which projects to accept, to adjust the rate at which the firm grows and as a measure for compensation within each business area, and as incentive compensation.

Marriott Corporation as a firm has a beta of 0.572, the result of diversifying industry risk ratings between the lodging business of 0.4212, the restaurant businesses of 0.9396 and a contract services division of 0.7373. The
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The compensation plan then reflects hurdle rates, which makes managers more sensitive to Marriott’s financial strategy and capital market conditions. Thirdly, Marriott could modify its hurdle rate to change its projected growth. A lower hurdle rate would expand the company faster than a higher one would.
Q2 - Marriott Corporation Hurdle Rate
We determined the WACC of Marriott Corpoation to be 11.27% using the following formula.

Given or Pre-Determined Variables
The Risk Free Rate of a 30-year Treasury Bond is given as 8.95%. Also given is the Market Risk Premium of 7.43% and a firm wide equity beta of 1.43. The tax rate is assumed to be 44.1%, the same as 1987’s 175.9M tax paid from 398.9M EIBT.

Cost of Equity

Cost of Debt

Weighted Average Cost of Capital

Q3 - Lodging Business Hurdle Rate

We determined the WACC of the Lodging business to be 9.70% by using the same method of analysis.
Given or Pre-Determined Variables
Tax Rate = 44.1%

Capital Structure = 74% Debt, 24% Equity Cost of Equity

Cost of Debt

Weighted Average Cost of Capital

Restaurant Business Hurdle Rates
Cost of Equity

Cost of Debt

Weighted Average Cost of Capital

Q4 - Contract Service Business Hurdle Rate
We determined the WACC of the Contract Services Business to be 14.44%
Given or Pre-Determined Variables
Tax Rate = 44.1%

Capital Structure = 40% Debt, 60% Equity

β of lodging

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