Case Questions

Marriott Corporation: The Cost of Capital (Abridged)

1. What is the weighted average cost of capital for Marriott Corporation?

a. What risk-free rate and risk premium did you use to calculate the cost of equity? Why did you choose these numbers?

b. How did you measure Marriott's cost of debt?

2. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? (15 pts) 3. What is the cost of capital for the lodging and restaurant divisions of Marriott? (Use pure play approach. Do not forget to adjust beta for leverage. Show your calculations clearly.)

a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?

(Hint: Risk premium is calculated over a risk-free rate. See Ch.12)

b. How did you measure the cost of debt for each division? Should the debt cost differ across divisions?

c. How did you measure beta of each division?

4. What is the cost of capital for Marriott's contract services division? How can you estimate its equity costs without publicly traded comparable companies?

(Hint: The asset beta (unlevered beta) of the company is just a weighted average of the asset betas of the divisions. The weights should be the fraction of identifiable assets in each division)

Important: It is very important that you show your calculations clearly. You should also make sure that you explain each number you used in your calculations.