Marriott Corporation: the Cost of Capital
Case 1- Marriott Corporation: The Cost of Capital
Some preliminary questions:
1. What do you think about Marriott’s policy of repurchasing shares?
Repurchase whenever stock price < warranted equity value
Does this mean the market is inefficient?
2. Why does Marriott manage rather than own hotel assets?
Finding limited partners on a hotel project is equivalent to selling private equity in the project
Is there any reason to expect the private equity market to work better/worse than the public equity market?
The main questions:
A. What is Marriott’s cost of capital?
B. What is Marriott’s cost of capital for lodging? for restaurants? for contract services
Question #1- Marriott’s WACC
Basic steps:
1. Identify (equity at the target debt-equity ratio
2. Identify appropriate estimate of risk-free rate rf
B. C. 3. Identify appropriate estimate of market risk premium (rm – rf)
D. 4. Use CAPM to estimate requity
E. 5. Identify appropriate measure of rdebt
F. 6. Use formula: rWACC = (1-TC)[D/(D+E)]rdebt + [E/(D+E)]requity
1. Identify (equity at the target debt-equity ratio
Note that (equity at current debt-equity ratio is estimated at 1.11
Current debt value is $2498.8 million
Current equity value is ($30 x 118.8 mil. shares) = $3564 million
Current D/E ratio is 2498.8/3564 = .70
Target D/(D+E) ratio = 60% ( Target D/E ratio = 1.5
Use formula from class notes:
(equity at current ratio = [1 + (1-TC)Debt/Equity](unlevered
( 1.11 = [1 + .66 x .70](unlevered
( .759 = (unlevered
← (equity at target ratio = [1 + .66 x 1.5] x .759
← (equity at target ratio = 1.51
2.
Some preliminary questions:
1. What do you think about Marriott’s policy of repurchasing shares?
Repurchase whenever stock price < warranted equity value
Does this mean the market is inefficient?
2. Why does Marriott manage rather than own hotel assets?
Finding limited partners on a hotel project is equivalent to selling private equity in the project
Is there any reason to expect the private equity market to work better/worse than the public equity market?
The main questions:
A. What is Marriott’s cost of capital?
B. What is Marriott’s cost of capital for lodging? for restaurants? for contract services
Question #1- Marriott’s WACC
Basic steps:
1. Identify (equity at the target debt-equity ratio
2. Identify appropriate estimate of risk-free rate rf
B. C. 3. Identify appropriate estimate of market risk premium (rm – rf)
D. 4. Use CAPM to estimate requity
E. 5. Identify appropriate measure of rdebt
F. 6. Use formula: rWACC = (1-TC)[D/(D+E)]rdebt + [E/(D+E)]requity
1. Identify (equity at the target debt-equity ratio
Note that (equity at current debt-equity ratio is estimated at 1.11
Current debt value is $2498.8 million
Current equity value is ($30 x 118.8 mil. shares) = $3564 million
Current D/E ratio is 2498.8/3564 = .70
Target D/(D+E) ratio = 60% ( Target D/E ratio = 1.5
Use formula from class notes:
(equity at current ratio = [1 + (1-TC)Debt/Equity](unlevered
( 1.11 = [1 + .66 x .70](unlevered
( .759 = (unlevered
← (equity at target ratio = [1 + .66 x 1.5] x .759
← (equity at target ratio = 1.51
2.