1. +
Marriott
Corporation: The
Cost of Capital
Corporate Finance
Professor Christopher Kummer
Case 2
GROUP
3

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. +
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. +
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. +
DATA
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer

6. +
Variables
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer

7. +
Calculations
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer

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. +
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. +
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. +
Levered Betas
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer

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. +
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. +
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. +
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. +
WACC of the Divisions and
Consolidated
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer

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