Marriott Corporation: the Cost of Capital

2323 Words Apr 1st, 2013 10 Pages
Marriott Corporation: The Cost of Capital (Abridged) Are the four components of Marriot 's financial strategy consistent with its growth objective?
Since its foundation in 1927 Marriott Corporation grew into one of the leading lodging and food services in the US. With three major business lines: lodging, contract services and related business, Marriott has the intention to remain a premier growth company. To achieve this goal the corporation’s strategy is to develop aggressively appropriate opportunities within their business lines. Marriott would like to be the preferred employer, the preferred provider and the most profitable company in each of the operating areas. The financial strategy includes four key elements: Manage rather
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For restaurants and contract services I chose the 1-year maturity bond of 6.9% as they are short term investments.

rD=(0.5*0.0872+0.4*0.069+0.25*0.069)+(0.5*0.011+0.6*0.014+0.75*0.018)=0.1159=11.59%

Risk free rate (rf)
I take the “Long –Term U.S. Government Bond Returns from 1926-1987” as appropriate risk free rate from Exhibit 4. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. “Long –Term U.S. Government Bond Returns from 1926-1987” are include the whole lifetime of Marriot and are more or less risk free.

rf=4.58%

Market risk premium
As Market risk premium I take the “Spread between S& P 500 Composite Returns and Long-Term U.S. Government Bond Returns 1926-1987” from Exhibit 5 as appropriate value.

market risk premium=7.43%

Cost of equity (expected return for
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