Marriot Case
Marriot use the Weighted Average Cost of Capital to estimate the cost of capital for the corporation as a whole and for each division, and the hurdle rate is updated annually.(WACC = (1-Tc) * (D/A) * R[D] + (E/A) * R[E])
Marriot’s Tax Bracket = 175.9/398.9 = 44%
Division’s asset weight to the corporation:
Lodging = 2777.4/4582.7 = 0.59
Contract = 1237.7/4582.7 = 0.28
Restaurant = 567.6/4582.7 = 0.13
Risk free rate is 30 years T-Bond = 8.95% (Lodging use long-term debt)
Market Premium is the Spread between S&P 500 and long-term US bond = 7.43%
Debt rate premium above government = 1.10% Lodging’s D/A = 0.74 & Lodging’s E/A = 0.26
We use Ramada Inns, Inc. as the comparable to find β for Marriot’s
*…show more content…*

Instead, we can compute the βu[C] with the relationship of each division and the corporation. The β of Contract division: βu[M]* = W[L] * βu[L] + W[C] * βu[C] + W[R] * βu[R] 0.444 = 0.59 * 0.476 + 0.28 * βu[C] + 0.13 * 0.72 βu[C] = 0.25 β[C] = [1 + (0.4/0.6)*(0.56)] * 0.25 = 0.35 Contract’s R[D] = 6.90% + 1.40% = 8.30% Contract’s R[E] = 0.069 + 0.35 * 0.0847 = 9.87% Cost of Capital for Contracting Division is: WACC(Contract) = R[C] = (1-Tc) * (D/A) * R[D] + (E/A) * R[E] = 0.56 * 0.40 * 0.083 + 0.60 * 0.0987 = 7.79% Marriot’s cost of capital is the weighted average of the cost of company debt and the cost of company equity, which is mathematically the same as the weighted-average of the divisional costs of capital weighted based on net identifiable assets. Division’s Cost of Capital: Lodging =

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