Marriott Instructions

Marriott Corporation: The Cost of Capital

Instructions

Find the cost of capital (WACC) for each of Marriott’s three divisions:

* Lodging

* Contract Services

* Restaurants

Assume that all companies are in the 35% tax bracket. Base all your work on the facts that are given in the case. There is no need for any additional assumptions.

Follow the following steps:

1. Find the asset betas of the pure-plays in the restaurant and lodging industries. Note: To some degree, this is a matter of opinion as to what is a pure-play in each of these industries. Make what you consider to be the best choices.

2. Calculate a weighted average asset beta for each of those two industries by weighting each pure-play by its sales

3. Relever these asset betas using Marriott’s target capital structure so that you come up with the equity beta that Marriott should use for each of these two divisions

4. Use the equity betas you just calculated and information contained in the case to calculate the WACCs for the restaurant and lodging divisions of Marriott. Note: Again, there is some subjectivity as to what values you should use as your inputs into the CAPM. Be prepared to justify your choices

5. Using Marriott’s overall asset beta and the values you came up with for the restaurant and lodging divisions, determine the WACC for Marriott’s contract services division. Consider that Marriott’s asset beta is a weighted average of the asset betas of its three divisions (weighted by sales)

On the day the assignment is due, turn in a hard copy of your answers to the following questions:

1. Which firm(s) did you use as pure-plays for the lodging industry?

2. What is the weighted average asset beta for your lodging pure-plays?

3. What is the equity beta that Marriott should use for its lodging division?

4. What should Marriott use as the risk-free rate in its CAPM model?

5. What should the market risk premium be in the CAPM model?...