Marriott Corp The Cost of Capital Abridged Case Solution

Case Solution

Gives students the possibility to educate yourself regarding what sort of company uses the Capital Resource Prices Model (CAPM) to compute the cost of capital for each of the divisions. Using Weighted Average Cost of Capital (WACC) formula as well as the mechanics of utilizing it are stressed.

Excel Calculations

Cost of Debt Calculation

Debt Premium, Risk-free Rate, Return on Debt 

Cost of Equity Calculation

Equity Beta, Market Risk Premium, Return on Equity

Tax Rate

WACC

Asset Beta Calculation

Lodging Beta, Restaurants Beta, Contract Services Beta

Questions Covered

1) Are the four components of Marriott's financial strategy consistent with its growth objective?

2) How does Marriott use its estimate of its cost of capital? Does this make sense?

3) What is the weighted average cost of capital for Marriott Corporation as a whole? What risk-free rate and risk premium do you use to calculate the cost of equity? How do you measure Marriott's cost of debt?

4) What type of investments would you value using Marriott's cost of capital?

5) If Marriott used a single hurdle rate for evaluating projects in each of its divisions, what would happen to the company over time?

6) What are the costs of capital for the lodging and restaurant divisions of Marriott? 

a) What risk-free rate and market risk premium do you use in calculating the cost of equity capital for each division?  How do you choose these numbers?

b) Did you use arithmetic or geometric averages to measure rates of returns? Why?

c) How do you measure the cost of debt for each division? Should the cost of debt differ across divisions? Why?

d) How do you measure the beta of each division?

7) What is the cost of capital for Marriott's contract services division? How can you estimate its cost of equity when there are no publicly traded comparables?

8) Marriott also considered using the hurdle rates to determine incentive compensation. How do we link this with the Economic Value Added (EVA) approach?