Marriott Corporation: the Cost of Capital (Abridged)

2507 WordsApr 16, 201211 Pages
Marriott Corporation: The Cost of Capital (Abridged) Executive Summary: The case "Marriott Corporation: The Cost of Capital (Abridged)" focuses on an ideal opportunity to review the capital asset pricing model and the weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and the difference between the…show more content…
Overall, Marriott's bottom line would suffer if they used a firm-wide inappropriate benchmark, which could be avoided by calculating different divisions proxy for different average project risk levels, then using the divisional approach to calculate separate WACC's for each division. This will result in fewer errors and an improved bottom line as well as better pipeline for viable new opportunities. Failure to do so over time will result in Marriott making large investment mistakes, overfunding risky divisions and projects while underfunding or rejecting projects that should have been accepted. After making error after error in their investment choices, working capital would be diminished to such a point, and shareholders so unhappy, feasibly the company would not be able to continue operations without a complete overhaul of their investment evaluation technique. Using a single corporate hurdle rate for investment opportunity evaluation would clash directly with one of Marriott's four main investment strategies; Invest in projects that increase shareholder value. In Marriott's 1987 annual report it states, "We intend to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses." Aggressively developing opportunities does not equate to

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