marriot corp case

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Marriott Corporation: The Cost of Capital

Corporate FinanceProfessor Christopher Kummer

Case 2GROUP

3

01/05/2023

+MARIOTT CORPORATION:Financial StrategyManage rather than own hotel assets

Invest in projects that increase shareholders value

Optimize the use of debt in capital structure

Repurchase undervalued sharesMarriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer

01/05/2023

+THE ISSUE

CALCULATING WACC OF THREE DIVISIONSLodgingRestaurantContract Services

Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer

01/05/2023

+CALCULATING WACC

To determine the opportunity cost of capital for Marriot Corporation, three inputs are required: debt capacity, debt cost, and equity cost consistent with the amount of debt.

The cost of capital depends on each division.


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+DATA


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+Variables


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+Calculations


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+The Cost of Equity

The Return on Equity (Re) was calculated using the CAPM Model:


Re = Risk Free Rate+

Beta*(Market Risk Premium)

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+The Cost of EquityRisk Free rates employed in CAPM model:

30YR US Gov’t Interest Rate for the Lodging Division due to the long-term assets required in the business

10YR US Gov’t Interest Rate for the Restaurant Division due to the medium term assets required

1YR US Gov’t Interest Rate for the Contract Services Division due to the very short terms assets used in that businessMarriott Corporation: The Cost of Capital

Corporate Finance - Professor Christopher Kummer

01/05/2023

+Betas

Beta was re-levered for each division using Hamada's equation and the appropriate capital structure for the division.


BL = BU * [1 + (1-T) * D / E]

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+Levered Betas


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+The Cost of Equity

The Long term Market Risk Premium and the Long term Risk Free Rate were applied in the calculations for greater accuracy in the estimation of risk.


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+Debt Capacity and the Cost of Debt The Premium of Company Debt over Gov’t Interest Rates were obtained from the case study and used to calculate Rd.

Equity / Capital and Debt / Capital were simply calculated using the known D/E ratios.


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+Cost of Capital

WACC was calculated using the standard equation:

WACC = Re * E/C + Rd * D/C * (1-tax rate) Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer

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WACC OF THE DIVISIONS

Division WACCLODGING 7.60%

RESTAURANT 7.32%CONTRACT SERVICES 7.81%MARRIOTTCORP. 7.73%

Final Results

01/05/2023Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer

01/05/2023

+WACC of the Divisions and Consolidated


+ GROUP 3Jenni BianchiToni HornHervert MendezLynette Mc QuiddyRoshan VaswaniWeiliang Zhang

01/05/2023


marriot corp case

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