Marriott Corporation
Marriott Corporation: The Cost of Capital (Abridged)
General Approach
The company is split into 3 divisions Lodging, Contract Services and Restaurants. The WACC for each of the 3 divisions and then subsequently the entire corporation’s WACC need to be calculated. This will be done through calculating the WACC for each of the 3 divisions and then taking a weighted average of these 3 divisional WACC numbers to get the overall Marriott Corporation WACC.
1. Calculating the Beta a. Calculate the levered Beta for each division: BL = BU (1+D/E). Assumption made that there will be no ITS and Riskless debt, as the data of the comparable companies in the case don’t provide these details. b. Using Exhibit 3, we take the comparable Hotels and Restaurants to calculate the divisional BU for both the Lodging and Restaurant divisions of Marriot. For instance for Lodging, we would get the BU for Hilton, Holiday, La Quinta and Ramada and take the average of these Betas to get the estimate of BU for the Marriott Lodging Division. You would follow the same logic for Restaurants. c. We are also able to calculate the total Marriot Corporation Beta. Since the total Marriot Corporation Equity Beta is the composition of the Hotels, Restaurants and Contract Services, we can extrapolate the BU for Contract Services. We assume the best way to do this would be to weight the divisions by Sales. d. Using the BU from the previous steps we can calculate the levered Beta. We can get BL = BU (1+D/E), for each of the divisions. Note that D/E ratios can be obtained from Table A. 2. Use the CAPM to calculate the individual divisional cost of levered equity:
RL = RF + MRP x BL e. Note that RF = RD f. Get the MRP using the data in Exhibit 4 - U.S. Government Interest Rates and the Exhibit 4, which has the annual holding period returns. g. Based on statements in the case we can get the RF from Table we would assume a
General Approach
The company is split into 3 divisions Lodging, Contract Services and Restaurants. The WACC for each of the 3 divisions and then subsequently the entire corporation’s WACC need to be calculated. This will be done through calculating the WACC for each of the 3 divisions and then taking a weighted average of these 3 divisional WACC numbers to get the overall Marriott Corporation WACC.
1. Calculating the Beta a. Calculate the levered Beta for each division: BL = BU (1+D/E). Assumption made that there will be no ITS and Riskless debt, as the data of the comparable companies in the case don’t provide these details. b. Using Exhibit 3, we take the comparable Hotels and Restaurants to calculate the divisional BU for both the Lodging and Restaurant divisions of Marriot. For instance for Lodging, we would get the BU for Hilton, Holiday, La Quinta and Ramada and take the average of these Betas to get the estimate of BU for the Marriott Lodging Division. You would follow the same logic for Restaurants. c. We are also able to calculate the total Marriot Corporation Beta. Since the total Marriot Corporation Equity Beta is the composition of the Hotels, Restaurants and Contract Services, we can extrapolate the BU for Contract Services. We assume the best way to do this would be to weight the divisions by Sales. d. Using the BU from the previous steps we can calculate the levered Beta. We can get BL = BU (1+D/E), for each of the divisions. Note that D/E ratios can be obtained from Table A. 2. Use the CAPM to calculate the individual divisional cost of levered equity:
RL = RF + MRP x BL e. Note that RF = RD f. Get the MRP using the data in Exhibit 4 - U.S. Government Interest Rates and the Exhibit 4, which has the annual holding period returns. g. Based on statements in the case we can get the RF from Table we would assume a