Reference no: EM131739108

CASE MARRIOTT CORPORATION: THE COST OF CAPITAL

For the big picture, think about the role of the cost of capital (or: hurdle rate) as an integral part of Marriott's financial policy and the importance of the distinction between firm and project/divisional cost of capital (conceptual part).

Then, try to determine the cost of capital for Marriott and each of its divisions, using the financial market information given in the case, as well as information for Marriott and its financial policy. For this part, you will need to perform some quantitative analysis (you can use the spreadsheet with case exhibits as a starting point). Think about how you would pick the risk free rate and the market risk premium, and which information you would use as a basis for the divisional hurdle rates, and why. In your analysis, you will need to make some choices and assumptions. Make sure that you clearly motivate what you do (different assumptions are possible/justifiable in the analysis), and that you show all your calculations.

Before you start the calculations, you first map out the steps to go through and the information you need (similar to the road map). Based on that, you can see whether the case provides the necessary information and/or whether you would need to make additional assumptions. This will provide some structure to your analysis and will be a good basis for your case report.

Some suggestions on the case analysis: (1) Throughout the analysis, you can assume a marginal corporate tax rate of 34% (consistent with the US Tax Reform Act of 1986, which resulted in a lower statutory corporate tax rate). (2) You can ignore the difference between fixed rate debt and floating rate debt in your case analysis. (3) The capital structure weights in the cost of capital formula should be based on market values. In practice, we often proxy the market value of debt by the book value of debt and define the market debt ratio as the book value of debt divided by the sum of the book value of debt and the market value of equity (see also footnote c in Exhibit 3).

Write a case report (first paragraph you should summaries the case), your case report should answer below questions:

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

2. What is the Weighted Average Cost of Capital for Marriott Corporation?

(i) What risk-free rate and risk premium do you use to calculate the cost of equity? Motivate your answer.

(ii) How do you measure Marriott's cost of debt? Explain.

3. What type of investment projects would you value using Marriott's WACC?

4. What is the hurdle rate for Marriott's lodging and restaurant divisions?

(i) What risk-free rate and risk premium do you use in calculating the cost of equity for each division? Why?

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

(iii) How do you measure the beta for each division?

5. What is the cost of capital for Marriott's contract services division? How can you estimate its equity costs without publicly traded comparable companies?

Attachment:- Assignemnt Files.rar