Harvard Business School 9-298-101 Rev. March 18‚ 1998 Marriott Corporation: The Cost of Capital In April 1988‚ Dan Cohrs‚ vice president of project finance at the Marriott Corporation‚ was preparing his annual recommendations for the hurdle rates at each of the firm ’s three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987‚ Marriott ’s sales grew by 24% and its return on equity stood
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Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand‚ expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time‚ Marriott had three main lines of business‚ lodging‚ contract services and restaurants‚ with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning‚
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unsure of her decision on Nike stock; she proceeded to ask Joanna Cohen to estimate Nike’s weighted average cost of capital. IV. Constraints on Solution Cohen calculated a weighted average cost of capital of 8.4 percent by using the capital asset pricing model for Nike Inc. Cohen’s calculations are incorrect because she used the book value for both debt and equity. When calculating cost of capital‚ the
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Executive Summary The case‚ Marriott Corporation: The Cost of Capital (Abridged)‚ concentrates on making decisions based on capital asset pricing model (CAPM) and the weighted average cost of capital (WACC) to measure the opportunity cost for investments. Dan Cohrs‚ the Vice President of Finance of Marriott Corporation‚ had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging‚ restaurant and contract services. In calculating
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products are sold everywhere convenience stores‚ grocery stores and kiosks. 2 - Cost of Capital A company’s capital is consists of mostly debt or equity. Equity and debt are external sources of financing and financing from external sources is not without cost. The cost of capital is the cost to raise capital through equity and debt. It can be defined as the weighted sum of the cots of equity and the cost of debt. It determines the rate of return that a firm would receive if it invested its
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Cost of Equity: For the risk-free rate‚ we decided to use the 30-year old Treasury yield‚ which is currently 4.6%. We believe it is important to match the time horizon when comparing financial assets. Given that stocks have essentially an endless time horizon‚ the 30-year Treasury seems a more reasonable asset by which to compare stocks. 1-month Treasury Bills‚ for instance‚ are comparable to safety-deposit boxes‚ which are completely safe‚ but cannot ever yield a return. It’s highly likely that
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Corporation -Cost of Capital Nabil Naouli Yong Peng Ahmed Alenazi Raj Kancharapu Table of Contents 1. Introduction 2 2. History 2 a. Top Competitors 4 b. Major Product and Services 5 c. SWOT Analysis 5 3. Calculating Cost of Capital 6 a. Calculating Cost of Equity 7 i. Risk free rate 7 ii. Market Risk Premium 8 iii. Beta 8 b. Calculating Cost of Debt 9 c. Weighted Average Cost of Capital ( WACC ) 10 d. WACC- EnCana Corp. 2010 12 4. Discussion Questions & Summary
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Marriott Case 1. What is the WACC for Marriott Corporation? Cost of Debt Tax Rate We determined this number by taking income taxes paid/EBITDA = 175.9/398.9 = 44.1% Return on debt There are two clear components of debt: fixed and floating. In order to get the fixed debt rate we took the interest rates on fixed-rate government securities and added the premium
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home improvement retailer. They are now the second largest retailer in the United States‚ offering 40‚000 to 50‚000 different types of home improvement supplies‚ building materials‚ and lawn and garden products. They carry a wide assortment of low-cost products‚ and offer expert advice and exceptional customer service. As an innovator of the home improvement industry‚ Home Depot has expanded into Canada‚ Mexico‚ Argentina‚ Chile‚ and Puerto Rico. Currently there are 1‚459 stores including fifty
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division‚ restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate‚ and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First of all‚ we will determine the cost of debt‚ cost of equity and the capital structure for the whole company. Then we will compute for the tax rate‚ and calculate the WACC
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