Download - Marriot Corp Case
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Marriott Corporation: The Cost of Capital
Corporate FinanceProfessor Christopher Kummer
Case 2GROUP
3
01/05/2023
+MARIOTT CORPORATION:Financial StrategyManage rather than own hotel assets
Invest in projects that increase shareholders value
Optimize the use of debt in capital structure
Repurchase undervalued sharesMarriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+THE ISSUE
CALCULATING WACC OF THREE DIVISIONSLodgingRestaurantContract Services
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+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.
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+DATA
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+Variables
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+Calculations
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+The Cost of Equity
The Return on Equity (Re) was calculated using the CAPM Model:
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
Re = Risk Free Rate+
Beta*(Market Risk Premium)
01/05/2023
+The Cost of EquityRisk 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 businessMarriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
01/05/2023
+Betas
Beta was re-levered for each division using Hamada's equation and the appropriate capital structure for the division.
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
BL = BU * [1 + (1-T) * D / E]
01/05/2023
+Levered Betas
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+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.
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+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.
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+Cost of Capital
WACC was calculated using the standard equation:
WACC = Re * E/C + Rd * D/C * (1-tax rate) Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
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WACC OF THE DIVISIONS
Division WACCLODGING 7.60%
RESTAURANT 7.32%CONTRACT SERVICES 7.81%MARRIOTTCORP. 7.73%
Final Results
01/05/2023Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
01/05/2023
+WACC of the Divisions and Consolidated
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer
+ GROUP 3Jenni BianchiToni HornHervert MendezLynette Mc QuiddyRoshan VaswaniWeiliang Zhang
01/05/2023
Marriott Corporation: The Cost of Capital Corporate Finance - Professor Christopher Kummer