Marriott Corporation Case Study

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Weighted average cost of capital for Marriot Corporation: In order to determine cost of capital, first we need to find out cost of equity and cost of debt. For determining the cost of equity we need to determine the beta for the target leverage ratio. According to the information provided by exhibit 3 equity beta is estimated at 0.97 when equity-to-total capital ratio is 0.59. Therefore we need to find unlevered beta value so that we can find firm’s equity beta at the desired leverage ratio as mentioned in Table A. Tax bracket of 44% is used based on ratio of income taxes to income before income taxes (175.9/398.9) in Exhibit 1. Beta Unlevered (βU) = 0.97 / [1+ (1-0.44) (0.41/0.59)] = 0.6982 Calculating beta at the targeted leverage …show more content…

(WACC) = 0.6× [(1-0.44)10.25] + 0.4 × 18.49 = 10.83% Did you use arithmetic or geometric averages to measure rates of return? We used arithmetic average to determine the annual rate of return. As rate of return calculated using arithmetic average gives higher return compared to geometric average, investors are more likely to estimate their future return based on arithmetic average measure. Hence we use arithmetic average to measure the rate of return to match the expected rate of return required by investors. What type of investments would you value using Marriott’s WACC? Marriot’s WACC can be used to value the investments having similar characteristics and divisions which were used to determine the WACC. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happened to the company over …show more content…

While determining beta we need to find out average unlevered beta of similar divisions. Lodging From Exhibit 3 Calculation of unlevered equity beta βU = β/1+(1-tax rate) × (Debt/Equity) Equity Beta Market Leverage Hilton Hotels Corporation 0.88 14% 0.80 Holiday Corporation 1.46 79% 0.47 La Quinta Motor Inns 0.38 69% 0.16 Ramada Inns 0.95 65% 0.46 Average unlevered beta 0.47 Now, calculating levered beta at given target ratio Beta levered (ΒL) = 0.47[1+ (1-0.44) (0.74/0.26)] = 1.21 For lodging division we use 30-year U.S Government Interest rate given in Table B as a risk-free rate which is 8.95%, and for risk premium we use arithmetic average spread between S&P 500 Composite Returns and Long-Term U.S Government Bond Returns given in Exhibit 5 which is 7.43%. Now, Cost of equity (Re) = 8.95% + 1.21×7.43% = 17.94% While determining the cost of debt we again used 8.95%,30 year U.S. Government Interest Rate given in Table B as the risk free rate plus 1.10% debt rate premium above Government rate, which is given in Table A. Cost of debt (Rd) = 8.95% + 1.10% =

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