Marriott Corporation: The Cost of Capital

1153 WordsApr 7, 20135 Pages
Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand, expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time, Marriott had three main lines of business, lodging, contract services and restaurants, with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning, investing in projects with the goal of increasing shareholder value, optimizing the use of debt, and repurchasing their undervalued shares. Marriott Corporation relied on measuring the opportunity cost of capital for investments by utilizing the…show more content…
What is the WACC for the lodging division of Marriott? | |Market Value Leverage | | |Unlevered | | |D/V |Beta |Tax Rate |Beta | | | |βs |τ |= βs / (1 + (1 – τ) D/E) | |Hilton |14.00 |0.76 |44.00 |0.70 | |Holiday |79.00 |1.35 |44.00 |0.43 | |La Quinta |69.00 |0.89 |44.00 |0.40 | |Ramada |65.00 |1.36 |44.00 |0.67 | |Total | | | | | |Average Unlevered Beta |0.55 | | | βu = 0.55 Cost of Equity Using the target debt ratio of 74%: βTs = βu (1 + (1 - τ) D/E) βTs = .55 (1 + (1 - .44)(.74/.26)) βTs = 1.427 Using CAPM: rE = rf + βTs (rm – rf) = 8.95% + 1.427(7.43%) = 19.55% Cost of Debt rD = government bond rate + credit
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