This document presents a case study on Marriott Corporation and estimating its weighted average cost of capital (WACC) for 1988. It provides background on Marriott, outlines the objectives and methodology, lists assumptions, and shows the results of estimating WACC for Marriott's lodging, restaurant, and services divisions as well as for the overall company. WACC was highest for restaurants at 11.05% and lowest for services at 5.74%, with the overall company WACC estimated at 8.04%. The conclusions discuss lessons on WACC estimation and how capital structure affects cost of capital.

1. INCEIF
THE GLOBAL UNIVERSITY OF ISLAMIC FINANCE
CORPORATE FINANCE
Semester June 2015
Shabeer Khan 1500006
Muhammad Ziaurrahman-1500025
Mohammad Hakim-1400235
Adama Dieye 150000318 mai 2016 1
MARRIOTT CORPORATION CASE STUDY: COST
OF CAPITAL

2. AGENDA
1.Background of Marriott
2. Significance of the issue
3. Task & Methodologies
4. Assumptions
5. Results of Estimations
6. Summary & Conclusions
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3. 1. Background of Marriott
-Created in 1927
-Business lines :
Lodging
Restaurant
Services
-Capital structure :
Debt
Common Stock
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4. 3.Objectives & Financial Strategy
Objectives:
-to be preferred employer
-to be preferred provider of service
-to be the most profitable company
Strategy:
-manage rather than own hotels
-invest in projects that increase shareholder’s
value
-optimize the use of debt in CAPEX
-repurchase undervalued shares
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5. 2. Significance of the topic “Cost of
Capital”
-Cost of capital and value of the firm
-Capital cost: rate of return expected.
-Hurdle Rates : used to select
investment project for the Marriott’s
each line of business.
-Hurdle Rates: used to determine the
annual incentive compensation. 5

6. 3. Task & Methodology
1)Determine the hurdle rates (The
WACC) for each line of business and for
Marriott ass a whole in year 1988 using
information of year 1987 .
2) Methodology:
-Estimation of Cost of Debt:
 RD & Tax Rate
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7. (cntd)
- Estimation of Cost of Equity:
RF , RM & Beta :
(Note: adjusted Beta for Marriott as a whole and for
each division)
- Estimation of weight to calculate
Beta for Services
-Rule of Thumb :
Increasing the hurdle rate by 1%
decreases the NPV 1%.
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8. 4. Assumptions
- Taxes Rate(1988)= Taxes Rates(1987)
= 175.9/398.9= 44.09%
-structure of the capital do not change
RF (risk free return): Long term US Government
Bonds returns (1926-1987): 4.58%
- RM (market return): S & P’ 500 Composite Stock
Index Returns (1926-1987): 12.01%
- βadjusted for Marriott as whole :
βadjusted = .33 + .67 xβregression = 1.07
Estimation of weighted Beta for Services8

9. 4. Assumptions (cntd)
- β for Lodging and restaurants : levered
average unlevered β of comparable companies
- βadjusted for Marriott as whole :
βadjusted = .33 + .67* βregression (1.1)= 1.07
- β for Lodging and restaurants : levered
average unlevered β of comparable companies)
-Estimation of β for Services by using sales
weights
- Estimation of cost of debt for Marriott as
whole= average cost of debt of divisions9

10. 5. Results of Estimation
Business Line: Lodging
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Costs of Equity:-
Rf MRP Beta Re
4.58% 7.43% 1.42 15.15%
Costs of Debt:
Base rate Spread Tax rate Rd*(1-T)
8.95% 1.10% 0.44 5.63%
WACCs:
D/D+S Rd*(1-T) S/D+S Re WACC
Lodging Cost of
Capital 74% 0.0563 26% 15.15% 8.10%
Microsoft Excel
97-2003 Worksheet

11. 5. Results of Estimation
Business Line: Restaurant
11
Costs of Equity:
Rf MRP Beta Re
3.54% 8.47% 1.41 15.52%
Costs of Debt:
Base rate Spread
Tax
Rate Rd*(1-T)
6.90% 1.80% 0.44 0.04872
WACCs:
D/D+S Rd*(1-T) S/D+S Re WACC
Restaurants 42% 0.0487 58% 15.52% 11.05%
Microsoft Excel
97-2003 Worksheet

12. 5. Results of Estimations
Business Line : Services
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Costs of Equity:
Rf MRP Beta Re
3.54% 8.47% 0.35 6.48%
Costs of Debt:
Base Rate Spread
Tax
Rate Rd*(1-T)
6.90% 1.40% 0.44 0.04648
WACCs:
D/D+S Rd*(1-T) S/D+S Re WACC
Services 40% 0.0465 60% 6.48% 5.74%
Microsoft Excel
97-2003 Worksheet

13. 5. Result of Estimations
WACC for Marriott (As a Whole)
13
Costs of Equity:
Rf MRP Beta Re
4.58% 7.43% 1.07 12.66%
Costs of Debt:
Base rate Spread
Tax
Rate Rd*(1-T)
7.58 1.43% 0.44 5.05%
WACCs:
D/D+S Rd*(1-T) S/D+S Re WACC
60% 5.05% 40% 12.66% 8.04%
Microsoft Excel
97-2003 Worksheet

14. Summary
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Company Cost of equity Cost of debt WACC
Lodging
15.15 5.63 8.1
Restaurant
15.52 4.87 11.05
Services
6.48 4.65 5.74
Marriott As a
whole
12.53 5.05 8.04

15. 6. Conclusions
Lesson on estimation of WACC for company as a
whole and for each business line
 the effect of capital structure on cost of capital
(by the Marriott case study)
 Higher WACC for restaurant indicates that the
company should be careful enough in investing in
restaurant as it demands for high required rate of
return compare to those of lodging and services.
The effects of cost of capital on firm’s
profitability and growth.
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16. Thank you
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