Hbs Case “Marriott Corporation: the Cost of Capital”
Marriott Corporation:
Questions for HBS case “Marriott Corporation: The cost of capital”
1) Are the four components of Marriott's financial strategy consistent with its growth objective?
In my opinion, the four components of Marriott's financial strategy are consistent with its growth objective.
As we find in the case, the four components of Marriott's financial strategy: Manage rather than own hotel assets, Invest in projects that increase shareholder value, Optimize the use of debt in the capital structure, and Repurchase undervalued shares; are aligned with the growth objective. Marriott wants to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas, their goal is to be the preferred employer, the preferred provider, and the most profitable company.
2) How does Marriott use its estimate of its cost of capital? Does this make sense?
In the case is stated that Marriott required three inputs to determine the opportunity cost of capital: debt capacity, debt cost, and equity cost consistent with the amount of debt. The cost of capital varied across the three divisions because all three of the cost-of-capital inputs could differ for each division. This is the most logical approach due to the fact that the projects related to a particular division should be evaluated using the division’s WACC rather than the corporation’s WACC.
3) What is the Weighted Average Cost of Capital for Marriott Corporation?
In order to calculate the WACC for Marriott’s Corporation I’m going to use the following formulas:
1. Weighted Average Cost of Capital:
2. Levered Beta:
Marriott’s structure:
D= 60%
E= 40% Marriott’s corporate tax:
Tc= 175.9 / 398.9
Tc= 0.441 Marriott’s Pre-tax cost of debt:
Debt rate premium above government= 1.30%
U.S. Government
Questions for HBS case “Marriott Corporation: The cost of capital”
1) Are the four components of Marriott's financial strategy consistent with its growth objective?
In my opinion, the four components of Marriott's financial strategy are consistent with its growth objective.
As we find in the case, the four components of Marriott's financial strategy: Manage rather than own hotel assets, Invest in projects that increase shareholder value, Optimize the use of debt in the capital structure, and Repurchase undervalued shares; are aligned with the growth objective. Marriott wants to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas, their goal is to be the preferred employer, the preferred provider, and the most profitable company.
2) How does Marriott use its estimate of its cost of capital? Does this make sense?
In the case is stated that Marriott required three inputs to determine the opportunity cost of capital: debt capacity, debt cost, and equity cost consistent with the amount of debt. The cost of capital varied across the three divisions because all three of the cost-of-capital inputs could differ for each division. This is the most logical approach due to the fact that the projects related to a particular division should be evaluated using the division’s WACC rather than the corporation’s WACC.
3) What is the Weighted Average Cost of Capital for Marriott Corporation?
In order to calculate the WACC for Marriott’s Corporation I’m going to use the following formulas:
1. Weighted Average Cost of Capital:
2. Levered Beta:
Marriott’s structure:
D= 60%
E= 40% Marriott’s corporate tax:
Tc= 175.9 / 398.9
Tc= 0.441 Marriott’s Pre-tax cost of debt:
Debt rate premium above government= 1.30%
U.S. Government