Marriott Corporation

The aim of this report is to provide estimation for the calculation of cost of capital as well as high level risk factors for the 3 main lines of business that Marriott Corporation operates. Marriott Corporation make investment decision on projects by discounting the appropriate cash flows by the appropriate hurdle rate for each division: lodging, contract services and restaurant operation. Marriott Corporation measures the opportunity cost of capital using weighted average of capital cost (WACC) as the appropriate method to calculate the hurdle rate, given by the below formula:

(1) WACC= (1-t)r_d(D/V)+r_e(E/V), where

(2) r=expected return= risk free rate + beta(risk premium)

Since most of the information provided was at corporation level, we have used various indicators from tables to exhibits to calculate needed variable values for each line of businesses.

Numerical Calculation of debt discount rate:

First of all based on the data provided in Table A, we estimated beta for debt.

Based on our class discussions, we assumed that for an investment level unlevered company beta should be zero and for an investment grade levered company beta should be between 0.1 and 0.2.

By looking at D/V ratios provided in Table A, we assigned 0.2, 0.1 and 0.1 as initial debt betas for lodging, contractor services and restaurant businesses respectively. Then we adjusted them by the proportion of floating debt versus the fixed one by assuming that floating interest payments on debt makes the company more open to market fluctuations thus more risky.

We then used formula (2) to calculate debt discount rate/ expected return on debt. We used the debt rate premium above government for each division provided in Table A and risk free rate from Table B. Because lodging assets like hotels has long useful lives, we used long term government bond rates for lodging business (30 years rate=8.95% p.a.) whereas due to shorter useful life assets in contract services and restaurant...