Marriott Corporation: the Cost of Capital

2898 Words Sep 27th, 2012 12 Pages
HBR Case #1
Marriott Corporation: The Cost of Capital

Group 16—Tutorial Mon 11:30am

Group members LIU Ying, Chloe | 1155019350 | LUO Yingying, Irika | 1155020931 | TIAN Tian, Sarah | 1155019114 | WU Jiajie, Jesse | 1155019061 |
17 September 2012
Executive Summary
By 1987, Marriott Corporation had grown into a large multi-dimensional company with over $5 billion assets in lodging, contract services and restaurants. The company enjoyed fast growth in both sales and assets at around 16% per year from 1984 to 1987 and aimed to continue this trend into the near future. The management was determined to develop the company into top players in each line of business and hence an aggressive growth objective has been set. Its
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As long as there is enough cash flow to cover interest rate expenses, the company is able to manage its debt and liquidity. Moreover, by efficiently maintaining liquidity level, Marriott is expected to maintain its A-rating in future debt financing activities such as issuing corporate debt. As debt is generally a cheaper financing resource than equity and that Marriott 's current leverage is not high, optimizing the use of debt is consistent with its growth objective. iv. Repurchase undervalued shares
Marriott regularly calculates the warranted equity value for its common shares and whenever its stock price went below the warranted value, Marriott would repurchase its stock. This is beneficial to the company 's growth in a sense that if the company expects its share price to increase in the future, they can re-sell these shares to obtain capital gains. Moreover, repurchasing shares gives the market a signal that management believes the stock is underpriced. This is a positive sign to the market and may attract more equity investors for Marriott, hence raising more funds to support fast development.
Marriott Corporation Weighted Average Cost Of Capital
To calculate Marriot Corporation’s cost of capital, WACC formula is used,
WACC= (1-t)*Rd*DV + Re*EV
To calculate Re, CAPM model can be used,
CAPM= Re = Rf+β*(Rm-Rf)= Rf+β*MRP i. Risk-free rate (Rf)
Risk-free rate is