Marriott Case Study Harvavd Business Review

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 comparables? Why? ➢ What cause each divisional WACC differ? ➢ What is the appropriate method of estimate cost of capital of each division? ➢ using comparables to get divisional betas – See Section F

The Marriott’s prevailing weighted cost of capital (WACC) is 10.48%. The first step to finding the prevailing WACC was to calculate the capital asset pricing model (CAPM). First, a risk free rate must be determined; this was done by taking the average return of the Long-Term U.S. government bonds and averaging it for the years 1987, 1986, 81-85, and 80-76. This came out to be a risk free rate of 9.14%. Next, the market risk premium needed to calculated, this equation is the spread between expected market return and the risk free rate. The same method to find the risk free rate was used to find the market risk premium, by taking average return of the spread between the the S&P 500 Composite returns and long-term U.S. government bond returns and averaging it for the years 1987, 1986, 81-85, and 80-76; this averaged out to a market risk premium of 3.11%. The last factor of the CAPM model is the beta for the company, the given beta of 1.11 was used in this calculation. When the rates and betas are all