Marriott Wacc

Executive Summary:

This report provides Marriott’s financial managers with calculations for the cost of capital for Marriott as a whole and for each of its three divisions (lodging, contract services and restaurants). Establishing accurate measures of these costs of capital is of critical importance when determining which projects to invest in (since Marriott uses a discounted cash flow methodology, which involves discounting future cash flows by a weighted average cost of capital, or WACC). The paragraphs and Table 1 below summarize our findings and the pages that follow provide more detailed explanations of how we arrived at these findings.

Marriot should use a WACC of 9.30% for the firm as a whole, 7.85% for the lodging division, 11.05% for the contract services division and 10.04% for the restaurants division.

Most of the difference in the WACC between the divisions is the result a result of two factors: the difference in equity betas and the difference in debt to equity ratios. By studying the equity betas (βE) of companies that engage in businesses comparable to those of Marriott’s divisions, we found that the contract services has more system risk than restaurants, which has more systemic risk than lodging. Since equity beta (βE) is an input which helps determine the required return on equity (rE), a higher βE is associated with a higher rE. In this case, the higher βE (systemic risk) for the contract services business implies that investors require a higher rE (return on equity) in the contract services business than for their investments in the lodging business, because the former is riskier. This effect is multiplied since Marriott has a target of maintaining 60% of its capital in equity for its contract services business and 26% in its lodging business.

There were also differences in some of the other key inputs – the risk free rate (rF), the cost of debt (rd) and the market risk premium, for example – but the variations in these did not lead to...