Marriott Corporation case
Marriott Corporation
The Cost of Capital
Author
Student Number
董晖
林桐
吴正浩
祝承懿
Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University
Table of Contents
Background
The hurdle rate is the required return or opportunity cost of each division and company. Only project with positive NPV discounted by hurdle rate will be invested, and the total return of Marriott up to all projects invested. Though there are many subjective aspects in estimation of WACC, common view and accepted formula will be adopted to calculate WACC, discretion if prudent used.
Key factors
1. Key factors of debt
a) Tax rate
Tax rate is based on state policy and net income of the company. Since tax rate of 1988 is not expected to change, tax rate of 1987 is the best estimation of rate of 1988, will be 44.10%.
b) Bench mark bond
Lodging division uses long term debt for debt, and based on going concern, 30-year bond rate is selected as bench mark, which is 8.95%。
Contract services division and restaurant division uses short-term debt rate, that is 1-year U.S. Government rate equals to 6.9%, also taken as risk free rate.
c) Bond rate of division and Marriott
As there are both floating and fixed rate bonds among divisions and Marriott, the bond rate can be calculated as
Bond rate of Division or Company =
Fraction of Debt at Floating *(Bench Mark Rate +Premium)
+ Fraction of Debt at Fixed * Fixed bond rate
d) Weight of Debt and Equity
Leverage level of 1988 is 60% of total capital debt, 40% of total capital equity, and leverage ratio (total capital / total equity) is 2.5
2. Key factors of equity
a) β of equity β is the asset’s contribution to market portfolio, that indicates the company operates solely in one industry should have same beta as the division within the same industry of another company, therefore based on long term equilibrium theory, as long as new competitors will entered the industry if there is a high
The Cost of Capital
Author
Student Number
董晖
林桐
吴正浩
祝承懿
Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University
Table of Contents
Background
The hurdle rate is the required return or opportunity cost of each division and company. Only project with positive NPV discounted by hurdle rate will be invested, and the total return of Marriott up to all projects invested. Though there are many subjective aspects in estimation of WACC, common view and accepted formula will be adopted to calculate WACC, discretion if prudent used.
Key factors
1. Key factors of debt
a) Tax rate
Tax rate is based on state policy and net income of the company. Since tax rate of 1988 is not expected to change, tax rate of 1987 is the best estimation of rate of 1988, will be 44.10%.
b) Bench mark bond
Lodging division uses long term debt for debt, and based on going concern, 30-year bond rate is selected as bench mark, which is 8.95%。
Contract services division and restaurant division uses short-term debt rate, that is 1-year U.S. Government rate equals to 6.9%, also taken as risk free rate.
c) Bond rate of division and Marriott
As there are both floating and fixed rate bonds among divisions and Marriott, the bond rate can be calculated as
Bond rate of Division or Company =
Fraction of Debt at Floating *(Bench Mark Rate +Premium)
+ Fraction of Debt at Fixed * Fixed bond rate
d) Weight of Debt and Equity
Leverage level of 1988 is 60% of total capital debt, 40% of total capital equity, and leverage ratio (total capital / total equity) is 2.5
2. Key factors of equity
a) β of equity β is the asset’s contribution to market portfolio, that indicates the company operates solely in one industry should have same beta as the division within the same industry of another company, therefore based on long term equilibrium theory, as long as new competitors will entered the industry if there is a high