Hbs Case “Marriott Corporation: the Cost of Capital”

Marriott toilet Questions for HBS crusade Marriott Corporation The bell of p for individually oney 1)Are the four components of Marriotts financial st markgy consistent with its growth objective? In my opinion, the four components of Marriotts financial strategy are consistent with its growth objective. As we find in the case, the four components of Marriotts financial strategy Manage kind of than own hotel assets, Invest in projects that increase shareholder value, Optimize the physical exertion of debt in the great structure, and Repurchase undervalued shares are aligned with the growth objective.Marriott wants to live a premier growth community. This means aggressively developing earmark opportunities within our chosen lines of businesslodging, contract services, and related businesses. In from each one of these areas, their goal is to be the preferred employer, the preferred provider, and the close to profitable company. 2)How does Marriott phthisis its estimate of its price of cracking? Does this make sense? In the case is stated that Marriott required three inputs to determine the opportunity represent of hood debt capacity, debt cost, and equity cost consistent with the amount of debt.The cost of roof varied across the three component parts beca subprogram all three of the cost-of-capital inputs could differ for each variability. This is the most logical approach due to the fact that the projects related to a grouchy division should be evaluated using the divisions WACC rather than the fellowships WACC. 3)What is the Weighted Average Cost of Capital for Marriott Corporation? In order to calculate the WACC for Marriotts Corporation Im sack to determination the sideline formulas 1. Weighted Average Cost of Capital 2. Levered beta Marriotts structure D= 60% E=40% Marriotts corporate taxTc= 175. 9 / 398. 9 Tc=0. 441 Marriotts Pre-tax cost of debt Debt rate premium above political sympathies= 1. 30% U. S. governance Securities pertain place due date 30 years = 8. 95% Kd = 0. 0895 + 0. 013 Kd= 0. 1025 Marriotts after tax cost of equity Leverag. Tc asset BetaEq. Beta MARRIOTT 41%0. 4410. 7991. 11 MARRIOTT 60%0. 4410. 7991. 47 Ke = rf + Beta * (MRP) Rf=8. 95%(U. S. government activity Securities avocation Rate) MRP=7. 43%(Exhibit 5) Ke = 8. 95% + 1. 47 * ( 7. 43%) Ke=0. 20 WACC = (1 0. 44) * 0. 1025 * 60% + 0. 2 * 40% WACC=0. 1139 The Weighted Average Cost of Capital for Marriott Corporation is 11. 9% a)What risk deliver rate and risk premium did you economic consumption to calculate the cost of equity? gamble free rate 30 years Maturity U. S. politics Interest Rate (8. 95%) take a chance Premium Spread amongst S 500 Composite wagess and long U. S. government bond returns between 1926-87 (7. 43%) b)How did you bank bill Marriotts cost of debt? I metrical Marriotts cost of debt adding Marriotts debt rate premium above government (1. 30%) to the 30 years Maturity U. S. Government Interest Rates (8. 95%). 4)What type of investment fundss would you value using Marriotts WACC?I go away exercise Marriotts WACC to evaluate projects that do not refer to a wizard division. This can be projects that add are related to the whole company and affect each division. In example, a project related with stigmatisation that will increase Marriott overall reputation and value 5)If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company overtime? Using a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business will lead to accept bad projects and reject profitable projects.In the case that the IRR of the return was slightly above Marriott WACC you would accept the divisions project although you office be operating bellow the divisions WACC and loosing money. 6)What is the cost of capital for the lodging and restaurant divisions of Marriott? In orde r to calculate the cost of capital for the lodging and restaurant divisions I will use the same formulas than in question 3. Hotels ReturnEq. BetaLeverageRevenuesAsset Beta HILTON HOTELS CORPORATION13. 30. 7614%0. 770. 697 HOLIDAY CORPORATION28. 81. 3579%1. 660. 435 LA QUINTA MOTOR INNS-6. 40. 8969%0. 170. 397 RAMADA INNS, INC. 11. 71. 3665%0. 50. 667 Average0. 549 Restaurants ReturnEq. BetaLeverageRevenuesAsset Beta church buildingS FRIED CHICKEN-3. 21. 454%0. 391. 417 COLLINS FOODS INTERNATIONAL20. 31. 4510%0. 571. 365 FRISCHS RESTAURANTS56. 90. 576%0. 140. 550 LUBYS CAFETERIAS (Operates cafeterias. ) 15. 10. 761%0. 230. 756 McDONALDS22. 50. 9423%4. 890. 805 WENDYS INTERNA TIONAL4. 61. 3221%1. 051. 149 Average1. 007 LodgingRestaurant D/V50. 0%75. 0% E/V50. 0%25. 0% Tc44%44% Kd10. 05%8. 70% Rf8. 95%6. 90% Rprem1. 10%1. 80% Ke15. 31%29. 74% Eq. Beta0. 8562. 696 Asset Beta0. 5491. 007 Rf8. 95%6. 90% EMRP7. 43%8. 47% Sales % from marrow41. 00%13. 00% WACC10. 6%11. 08% a)What riskles s rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? luck free rate Lodging division 30 years Maturity U. S. Government Interest Rate (8. 95%) Is a long-term investment Risk Premium Lodging division Spread between S&P 500 Composite returns and long-term U. S. government bond returns between 1926-87 (7. 43%) Is a long term investment Risk free rate Restaurants division 1 year Maturity U. S. Government Interest Rate (6. 90%) Is a short-term investment, and the next available cream is a 10 years rate which is too long.Risk Premium Restaurants division Spread between S&P 500 Composite returns and short-term U. S. Treasury bill returns between 1926-87 (8. 47%) Is a short-term investment, and I used a 1 year Maturity U. S. Government Interest Rate as the risk free rate. b)How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? I calculated each divisions cost of debt a dding the divisions debt rate premium above government to the U. S. Government Interest Rates that scoop out represented the divisions behave. Risk free rate Lodging division 30 years Maturity U. S. Government Interest Rate (8. 95%) Risk free rate Restaurants division 1 year Maturity U. S. Government Interest Rate (6. 90%) The debt cost should differ across divisions because each one operate as independent business with different behavior. c)How did you measure the beta of each division? In order to measure the beta of each division, I got the average Asset Beta of the companies that where more sympathetic to the division, and I leverage it with the capital structure of the particular division. 7)What is the cost of capital for Marriotts contract services division?How can you estimate its equity cost of capital without publicly traded comparable companies? In order to calculate the cost of capital for the contract service division I will use most of the formulas I stated on questi on number three. Additionally, as we do not have data of similar companies that we can use to extract the contract service divisions Asset Beta, I will calculate the WACC for the contract service division using the following formula Marriotts Asset Beta = (Lodging Asset Beta * divisions % of total sales) + (Restaurants Asset Beta * divisions % of total sales) + ( stimulate services Asset Beta * divisions % of total sales)Cleaning the comparability in function of the Contract services Asset Beta, you find the Contract services Asset Beta. MarriottLodgingRestaurantContract Services D/V60. 0%50. 0%75. 0%60. 0% E/V40. 0%50. 0%25. 0%40. 0% Tc44%44%44%44% Kd10. 25%10. 05%8. 70%8. 30% Rf8. 95%8. 95%6. 90%6. 90% Rprem1. 30%1. 10%1. 80%1. 40% Ke19. 87%15. 31%29. 74%21. 91% Eq. Beta1. 4700. 8562. 6961. 772 Asset Beta0. 7990. 5491. 0070. 964 Rf8. 95%8. 95%6. 90%6. 90% EMRP7. 43%7. 43%8. 47%8. 47% TA %100. 00%41. 00%13. 00%46. 00% WACC11. 39%10. 46%11. 08%11. 55% The contract services WACC is 11. 55%