Case ID: 289047

Solution ID: 31

Words: 2473

Price $ 75

Marriott Corporation has three divisions - lodging, contract services and restaurants - with different procedures. The organization uses three separate hurdle rates for that three divisions to value the suggested projects. It's thought this technique is appropriate that utilizing a single firm-wide discount rate since the procedures from the three divisions differ drastically. However, the organization needs to make sure that the organization uses a suitable discount rate for every division. Therefore, we calculate the right cost of capital for Marriott too for each one of the three divisions. An in depth analysis is presented concerning the appropriate calculation inputs for each one of the three divisions as well as other presumptions, made while carrying out the information, are justified.

Cost of Debt Calculation

*Debt Premium, Risk-free Rate, Return on Debt *

Cost of Equity Calculation

*Equity Beta, Market Risk Premium, Return on Equity*

Tax Rate

WACC

Asset Beta Calculation

*Lodging Beta, **Restaurants Beta, Contract Services Beta*

1) Are the four components of Marriott's financial strategy consistent with its growth objective?

2) How does Marriott use its estimate of its cost of capital? Does this make sense?

3) 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?

4) What type of investments would you value using Marriott's cost of capital?

5) If Marriott used a single hurdle rate for evaluating projects in each of its divisions, what would happen to the company over time?

6) What are the costs of capital for the lodging and restaurant divisions of Marriott?

a) What risk-free rate and market risk premium do you use in calculating the cost of equity capital for each division? How do you choose these numbers?

b) Did you use arithmetic or geometric averages to measure rates of returns? Why?

c) How do you measure the cost of debt for each division? Should the cost of debt differ across divisions? Why?

d) How do you measure the beta of each division?

7) What is the cost of capital for Marriott's contract services division? How can you estimate its cost of equity **when there are no publicly traded comparables**?

8) Marriott also considered using the hurdle rates to determine incentive compensation. How do we link this with the Economic Value Added (EVA) approach?