Essay Marriott Case Study Harvavd Business Review

1443 Words Nov 14th, 2011 6 Pages
Case questions • What is the cost of capital for Marriott’s as a whole at the prevailing capital structure vs. at the target capital structure. ➢ Be prepared to defend your specific assumptions about the various inputs adopted into equations. For example, the team is expected to suggest the proposed market risk premium. ➢ WACC should be estimated for the overall firm ▪ CAPM – equity beta vs. asset beta - see Section F • Compute a separate cost of capital (WACC) for the lodging business, contract services business and restaurant business. ➢ How was cost of debt measured of each division? Should the cost of debt differ across three divisions? Why? ➢ What is/are suitable …show more content…
The weight of equity and debt for the firm did not need to be calculated because they are given in Table A, debt 60%, and weight of equity, 40%. The same tax rate is also used in calculating the target WACC. The WACC for each of the three divisions of Marriott is also calculated as if they were separate entities. The first to be calculated will be Lodging, followed by Restaurants, then Contract Services. Each of the three divisions has a different WACC, this is due to different weights of debt and equity, rates of return on debt, and betas of the tree divisions, which lead to different WACCs for each division. Lodging’s WACC came out to be 7.95%. This was calculated using the same methods as the overall Marriott’s WACC. Starting with the CAPM model, the risk free rate and market risk premiums were the same as that for the firm. The significant difference was calculating the division’s beta. The beta was figured out by taking the average of all the proxy hotels’ betas’, in exhibit 3, then using the hamada equation to unlever that average. Finally, re-levering that beta in accordance with the target debt to equity ratio of 2.85 found in Table A. With this new levered beta we found our required rate of return for equity to be 14.25% for the lodging division. The required rate of return was then calculated by adding the debt rate premium above the government from Table A, 1.10% and the 10 year U.S. government

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