Marriott

Case 4: Marriott Corporation – Cost of Capital

1. How does Marriott use its estimate of its cost of capital? Does this make sense?

The WACC for the company as a whole, as well as each of its three divisions, are calculated and set as the hurdle rates. Divisional hurdle rates were also used as a benchmark for determining incentive compensation

Hurdle rates can be viewed as minimum required rate of return, meaning the internal rate of return for each project under each division must equal or exceed that hurdle rate in order to be considered / accepted. The overall hurdle rate for all accepted projects must also be equal or exceed the Marriott WACC to ensure a proper balance of profitability and risk between projects in all divisions.

This use of WACC at Marriott made sense, because it ensures that the company as a whole, made proper investments that yield that highest potential returns. Once the projects at each division were approved, managers only needed to ensure their projects are successful as expected, without having to worry about the performance of projects in other divisions, for incentive compensation.

2. What is the weighted average cost of capital for Marriott Corporation as a whole? What

risk-free rate and risk premium do you use to calculate the cost of equity? How do you

measure Marriott's cost of debt?

The WACC for Marriott as a whole, and its three major divisions, are tabled below.

  | Marriott

overall | Lodging | Contract | Restaurant | Source |

WACC= (1-T)*rD*(D/V) + rE*(E/V) | 8.88% | 7.71% | 10.61% | 11.53% |   |

  |   |   |   |   |   |

T, corporate tax rate | 43.7% | 43.7% | 43.7% | 43.7% | Exhibit 1 |

  |   |   |   |   |   |

D, market value of debt | 60% | 74% | 40% | 42% | Table A |

E, market value of equity | 40% | 26% | 60% | 58% | Table A |

V, value of firm | 100% | 100% | 100% | 100% |   |

  |   |   |   |   |   |

rD = gov rate + premium, pretax cost of debt | 10.25% | 10.05% |...