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Marriott
Corporation: The
Cost of Capital
Corporate Finance
Professor Christopher Kummer
Case 2
GROUP
3
+
MARIOTT CORPORATION:
Financial Strategy
Manage rather than own hotel assets
Invest in projects that increase
sharehold...
+
THE ISSUE
CALCULATING WACC OF THREE
DIVISIONS
Lodging
Restaurant
Contract Services
30/01/2015
Marriott Corporation: ...
+
CALCULATING WACC
To determine the opportunity cost of
capital for Marriot Corporation, three
inputs are required: debt ...
+
DATA
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
+
Variables
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
+
Calculations
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
+
The Cost of Equity
The Return on Equity (Re) was
calculated using the CAPM Model:
30/01/2015
Marriott Corporation: The ...
+
The Cost of Equity
Risk Free rates employed in CAPM model:
 30YR US Gov’t Interest Rate for the Lodging
Division due t...
+
Betas
Beta was re-levered for each division
using Hamada's equation and the
appropriate capital structure for the
divis...
+
Levered Betas
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
+
The Cost of Equity
The Long term Market Risk
Premium and the Long term Risk
Free Rate were applied in the
calculations ...
+
Debt Capacity and the Cost of Debt
The Premium of Company Debt over
Gov’t Interest Rates were obtained
from the case st...
+
Cost of Capital
WACC was calculated using the
standard equation:
WACC =
Re * E/C + Rd * D/C * (1-tax rate)
30/01/2015
M...
+
WACC OF
THE
DIVISIONS
Division WACC
LODGING 7.60%
RESTAURANT 7.32%
CONTRACT
SERVICES
7.81%
MARRIOTT
CORP.
7.73%
Final Re...
+
WACC of the Divisions and
Consolidated
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professo...
+ GROUP 3
Jenni Bianchi
Toni Horn
Hervert Mendez
Lynette Mc Quiddy
Roshan Vaswani
Weiliang Zhang
30/01/2015 Marriott Corpo...
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Marriot Corp Case

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Marriot Corp Case

  1. 1. + Marriott Corporation: The Cost of Capital Corporate Finance Professor Christopher Kummer Case 2 GROUP 3
  2. 2. + MARIOTT CORPORATION: Financial Strategy Manage rather than own hotel assets Invest in projects that increase shareholders value Optimize the use of debt in capital structure Repurchase undervalued shares 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  3. 3. + THE ISSUE CALCULATING WACC OF THREE DIVISIONS Lodging Restaurant Contract Services 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  4. 4. + 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. 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  5. 5. + DATA 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  6. 6. + Variables 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  7. 7. + Calculations 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  8. 8. + The Cost of Equity The Return on Equity (Re) was calculated using the CAPM Model: 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer Re = Risk Free Rate+ Beta*(Market Risk Premium)
  9. 9. + The Cost of Equity Risk 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 business 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  10. 10. + Betas Beta was re-levered for each division using Hamada's equation and the appropriate capital structure for the division. 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer BL = BU * [1 + (1-T) * D / E]
  11. 11. + Levered Betas 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  12. 12. + 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. 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  13. 13. + 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. 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  14. 14. + Cost of Capital WACC was calculated using the standard equation: WACC = Re * E/C + Rd * D/C * (1-tax rate) 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  15. 15. + WACC OF THE DIVISIONS Division WACC LODGING 7.60% RESTAURANT 7.32% CONTRACT SERVICES 7.81% MARRIOTT CORP. 7.73% Final Results 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  16. 16. + WACC of the Divisions and Consolidated 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
  17. 17. + GROUP 3 Jenni Bianchi Toni Horn Hervert Mendez Lynette Mc Quiddy Roshan Vaswani Weiliang Zhang 30/01/2015 Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer

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