Marriott Wacc Case Study

Marriot Case

Marriot use the Weighted Average Cost of Capital to estimate the cost of capital for the corporation as a whole and for each division, and the hurdle rate is updated annually.(WACC = (1-Tc) * (D/A) * R[D] + (E/A) * R[E])

Marriot’s Tax Bracket = 175.9/398.9 = 44%

Division’s asset weight to the corporation:
Lodging = 2777.4/4582.7 = 0.59
Contract = 1237.7/4582.7 = 0.28
Restaurant = 567.6/4582.7 = 0.13

Risk free rate is 30 years T-Bond = 8.95% (Lodging use long-term debt)

Market Premium is the Spread between S&P 500 and long-term US bond = 7.43%

Debt rate premium above government = 1.10% Lodging’s D/A = 0.74 & Lodging’s E/A = 0.26

We use Ramada Inns, Inc. as the comparable to find β for Marriot’s lodging division. (E/A = 0.35, βE = 1.36, and assuming βD = 0) βu[L] = (E/A)* βE = 0.35 * 1.36 = 0.476 β[L] = [1 + (D/E) * (1-Tc)] * βu[L] = [1 + (0.74/0.26)*(0.56)] * 0.476 β[L] = 1.23

Lodging’s R[D] = Rf + DRPAG = 8.95% + 1.10% = 10.05%

Lodging’s R[E] = Rf + β[E] * (Rp) = 0.0895 + 1.23 * 0.0743 = 18.09%

Cost of Capital for Lodging Division is:
WACC(Lodging) =R[L] = (1-Tc) * (D/A) * R[D] + (E/A) * R[E] = 0.56 * 0.74 * 0.1005 + 0.26 * 0.1809 = 8.86%

Risk free rate is 1 years T-Bill = 6.90% (Restaurant & Contract use shorter-term debt)

Market Premium is the spread between S&P 500 and short-term US bond = 8.47%

Debt rate premium above government = 1.80%

Restaurant’s D/A = 0.42 & Restaurant’s E/A = 0.58

We use McDonald’s as the comparable to find β for Marriot’s Restaurant division. (E/A = 77%, βE = 0.94, and assuming βD = 0) βu[R] = 0.77 * 0.94 = 0.72 β[R] = [1 + (0.42/0.58)*(0.56)] * 0.72 = 1.02

Restaurant’s R[D] = 6.90% + 1.80% = 8.70%

Restaurant’s R[E] = 0.069 + 1.02 * 0.0847 = 15.5%

Cost of Capital for Restaurant Division is:
WACC(Restaurant) = R[R] = (1-Tc) * (D/A) * R[D] + (E/A) *