This document discusses Marriott Corporation's calculation of the weighted average cost of capital (WACC) for its three divisions: lodging, restaurants, and contract services. It outlines the steps taken to determine the cost of equity using the CAPM model and leverage betas using Hamada's equation. It also discusses determining the cost of debt based on company debt premiums over government interest rates. The WACC is then calculated using the costs of equity and debt and weightings based on the capital structure. The WACC is calculated to be 7.60% for lodging, 7.32% for restaurants, 7.81% for contract services, and 7.73% for Marriott Corporation overall.

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