Marriott Corporation: the Cost of Capital
HBR Case #1
Marriott Corporation: The Cost of Capital
Group 16—Tutorial Mon 11:30am
Group members LIU Ying, Chloe | 1155019350 | LUO Yingying, Irika | 1155020931 | TIAN Tian, Sarah | 1155019114 | WU Jiajie, Jesse | 1155019061 |
17 September 2012
Executive Summary
By 1987, Marriott Corporation had grown into a large multi-dimensional company with over $5 billion assets in lodging, contract services and restaurants. The company enjoyed fast growth in both sales and assets at around 16% per year from 1984 to 1987 and aimed to continue this trend into the near future. The management was determined to develop the company into top players in each line of business and hence an aggressive growth objective has been set. Its financial strategies are in general consistent with its goal and would facilitate fast development in the near future. Company and divisional hurdle rates are computed in this report with various assumptions and references. Below is a table summarizing the financial data. | Lodging | Contract Services | Restaurant | Marriott Corp. | Risk-Free Rate (Rf) | 8.72% | 8.72% | 8.72% | 8.72% | Market Risk Premium (MRP) | 7.43% | 7.43% | 7.43% | 7.43% | Target D/V | 74% | 40% | 42% | 60% | Current D/V | - | - | - | 41% | β leveraged | 0.92 | - | 1.04 | 0.97 | β unlevered (βu) | 0.53 | - | 0.90 | 0.70 | β relevered (βl) | 1.37 | 1.09 | 1.27 | 1.29 | Cost of equity (Re) | 18.90% | 17.05% | 18.15% | 18.30% | Cost of debt (Rd) | 9.03% | 9.39% | 9.16% | 9.43% | Effective tax rate (t) | 43.68% | 43.68% | 43.68% | 43.68% | WACC | 8.68% | 12.35% | 12.69% | 10.51% |
Overall, Contract Services division has the highest weighted average cost of capital and Lodging division has the lowest. Since different lines of business are different in nature, this estimation is reasonable.
Financial Strategies of Marriott Corporation
Marriott Corporation is an international company whose sales and earnings per share had doubled over the
Marriott Corporation: The Cost of Capital
Group 16—Tutorial Mon 11:30am
Group members LIU Ying, Chloe | 1155019350 | LUO Yingying, Irika | 1155020931 | TIAN Tian, Sarah | 1155019114 | WU Jiajie, Jesse | 1155019061 |
17 September 2012
Executive Summary
By 1987, Marriott Corporation had grown into a large multi-dimensional company with over $5 billion assets in lodging, contract services and restaurants. The company enjoyed fast growth in both sales and assets at around 16% per year from 1984 to 1987 and aimed to continue this trend into the near future. The management was determined to develop the company into top players in each line of business and hence an aggressive growth objective has been set. Its financial strategies are in general consistent with its goal and would facilitate fast development in the near future. Company and divisional hurdle rates are computed in this report with various assumptions and references. Below is a table summarizing the financial data. | Lodging | Contract Services | Restaurant | Marriott Corp. | Risk-Free Rate (Rf) | 8.72% | 8.72% | 8.72% | 8.72% | Market Risk Premium (MRP) | 7.43% | 7.43% | 7.43% | 7.43% | Target D/V | 74% | 40% | 42% | 60% | Current D/V | - | - | - | 41% | β leveraged | 0.92 | - | 1.04 | 0.97 | β unlevered (βu) | 0.53 | - | 0.90 | 0.70 | β relevered (βl) | 1.37 | 1.09 | 1.27 | 1.29 | Cost of equity (Re) | 18.90% | 17.05% | 18.15% | 18.30% | Cost of debt (Rd) | 9.03% | 9.39% | 9.16% | 9.43% | Effective tax rate (t) | 43.68% | 43.68% | 43.68% | 43.68% | WACC | 8.68% | 12.35% | 12.69% | 10.51% |
Overall, Contract Services division has the highest weighted average cost of capital and Lodging division has the lowest. Since different lines of business are different in nature, this estimation is reasonable.
Financial Strategies of Marriott Corporation
Marriott Corporation is an international company whose sales and earnings per share had doubled over the