Marriott Corporation Cost of Capital

2876 Words Jan 19th, 2012 12 Pages
Executive Summary
The case, Marriott Corporation: The Cost of Capital (Abridged), concentrates on making decisions based on capital asset pricing model (CAPM) and the weighted average cost of capital (WACC) to measure the opportunity cost for investments. Dan Cohrs, the Vice President of Finance of Marriott Corporation, had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging, restaurant and contract services. In calculating rates, he had to face two major problems. First, he has to decide if it’s better to use one hurdle rate for all divisions or use multiple hurdle rates for each respective division. In addition to calculating hurdle rate, he had to choose the
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Coverage-based financing policy was used on each of Marriott’s lines of business. The fraction of debt was found on a floating-rate debt basis and was sensitive to the interest rate changes. Thus debt capacity would increase along with cash flows and interest rates.
Marriott’s unsecured debt was A rated in 1988, and thus they could be expected to pay a spread above the current government bond rates. Each line of business had a different spread between the debt rate and the government bond rate due the varying differences in risk. Lodging was considered to have longer useful lives and thus Marriott would use long-term debt for their lodging cost of capital. Restaurant and contract services had shorter useful lives and therefore a shorter term debt was used to determine cost of debt.
Marriott’s goal of only investing in projects that increased shareholder value meant that they must use the shareholders’ measure of equity costs. Capital Asset Pricing Model or CAPM was used to determine cost of equity for Marriott’s lines of business.

Financial Strategy
Marriott’s growth objective is to be a premier growth company. The components of this financial strategy are (1) manage rather than own hotels; (2) invest in projects that increase shareholder value; (3) optimize the use of debt in the capital structure; and (4) repurchase undervalued stock. All
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