Marriott Corporation
Marriott Corporation: The Cost of Capital
Simrith Sidhu, Amy-Jane Miocevich, Jacques Rousset, Jing Tao
Task One:
Marriott uses the Weighted Average Cost of Capital (WACC) to measure the opportunity cost for investments. WACC is calculated using the 1987 financial data provided in the Marriot Corporation: The Cost of Capital (Abridged) case study and estimators.
WACC = Cost of Equity x (Equity/Debt +Equity) + Cost of Debt x (Debt/(Debt + Equity)) x (1 – Tax Rate)
This method is applied for Marriott as a whole and its three divisions (lodging, contract services and restaurants). Marriott uses their WACC’s to discount appropriate cash flows by the appropriate and related divisional hurdle rate. This allows them to calculate the Net Present Value (NPV) of investment projects and evaluate their future and current investments. Also, Marriott has considered using their hurdle rates as a method of determining incentive compensation for managers.
Calculating Marriott’s WACC:
In order to calculate the WACC for the whole of Marriott, we are required to use the equity beta provided in exhibit 3 of the case study. We use the market leverage percentage (also in exhibit 3) to get the book debt/equity ratio and find the unlevered beta. We chose to use the market leverage ratio of 41% instead of the market debt to equity ratio in exhibit 1 of 58.8% so that we are consistent with the calculations WACC for the three divisions of Marriott. To calculate the unlevered beta we use Hamada’s formula (Fernandez, 2003).
Unlevered Beta = Equity Beta / (1 + (1 – tax rate) x (Debt/Equity)) = 1.11 / (1 + (1 – 0.34) x 0.6949 = 0.7610
We use the unlevered beta and the market value target leverage ratios (from table A of the case study) to calculate the levered beta and subsequently, calculate the return on equity. This is shown below and in appendix 1.1 and 1.2.
Levered Beta = Unlevered Beta x (1 + (1 – tax rate) x (Target Debt/Target Equity) = 0.7610 x (1 +
Simrith Sidhu, Amy-Jane Miocevich, Jacques Rousset, Jing Tao
Task One:
Marriott uses the Weighted Average Cost of Capital (WACC) to measure the opportunity cost for investments. WACC is calculated using the 1987 financial data provided in the Marriot Corporation: The Cost of Capital (Abridged) case study and estimators.
WACC = Cost of Equity x (Equity/Debt +Equity) + Cost of Debt x (Debt/(Debt + Equity)) x (1 – Tax Rate)
This method is applied for Marriott as a whole and its three divisions (lodging, contract services and restaurants). Marriott uses their WACC’s to discount appropriate cash flows by the appropriate and related divisional hurdle rate. This allows them to calculate the Net Present Value (NPV) of investment projects and evaluate their future and current investments. Also, Marriott has considered using their hurdle rates as a method of determining incentive compensation for managers.
Calculating Marriott’s WACC:
In order to calculate the WACC for the whole of Marriott, we are required to use the equity beta provided in exhibit 3 of the case study. We use the market leverage percentage (also in exhibit 3) to get the book debt/equity ratio and find the unlevered beta. We chose to use the market leverage ratio of 41% instead of the market debt to equity ratio in exhibit 1 of 58.8% so that we are consistent with the calculations WACC for the three divisions of Marriott. To calculate the unlevered beta we use Hamada’s formula (Fernandez, 2003).
Unlevered Beta = Equity Beta / (1 + (1 – tax rate) x (Debt/Equity)) = 1.11 / (1 + (1 – 0.34) x 0.6949 = 0.7610
We use the unlevered beta and the market value target leverage ratios (from table A of the case study) to calculate the levered beta and subsequently, calculate the return on equity. This is shown below and in appendix 1.1 and 1.2.
Levered Beta = Unlevered Beta x (1 + (1 – tax rate) x (Target Debt/Target Equity) = 0.7610 x (1 +