Marriott Corporation: the Cost of Capital Essay

3304 WordsOct 8, 201014 Pages
FIN – 502, dR. GEORGE gALLINGER | Case Analysis – Marriott | Detailed - Individual Assignment | | Ankur Sharma | Evening Accelerated MBA - T/Th – Class of 2011 | W P Carey School of Business, Arizona State University | The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is assessed separately. Marriott's growth objective Vs financial strategy Marriot’s growth objective is to be the preferred employer, preferred provider and the most profitable company within the chosen line of businesses – lodging, contract services…show more content…
Although, it is true that lower hurdle rates would translate into high growth projects, but including it in Manager’s compensation plan might lead to agency problem where managers may try to manipulate the hurdle rates in order to get the projects through and make money. Marriott’s WACC Marriot calculates its Weighted Average Cost of Capital (WACC). Using the following equation: WACC = (1-corporate tax rate)(Pretax rate of cost of debt)(Market value of debt/ D+E))+ After tax rate of cost of equity(market value of equity/D+E)) Cost of Debt Cost of Debt = (1-Ʈ) rd, where rd is the rate for pretax cost of debt and (1-Ʈ) represent the tax shield. Ʈ- Corporate tax rate = 41.6% | Year | 1978 | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | A | Income before taxes | 83.5 | 105.6 | 103.5 | 121.3 | 133.7 | 185.1 | 236.1 | 295.7 | 360.2 | 398.9 | B | Income taxes | 35.4 | 43.8 | 40.6 | 45.2 | 50.2 | 76.6 | 100.8 | 128.3 | 168.5 | 175.9 | | Income tax rate = (B/A)% | 42% | 41% | 39% | 37% | 38% | 41% | 43% | 43% | 47% | 44% | | | | | | | | | | | | | | Marriot Tax rate (Avg. 1978-1987) | 41.6% | | | | | | | | | | (Fig. 1) This is estimated using the data given in case (Exhibit 1). Considering the tax rates of last ten
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