# Marriott Wacc Case Study Assignment Words: 515

Marriot Case Marriot use the Weighted Average Cost of Capital to estimate the cost of capital for the corporation as a whole and for each division, and the hurdle rate is updated annually. (WACC = (1-Tc) * (D/A) * R[D] + (E/A) * R[E]) Marriot’s Tax Bracket = 175. 9/398. 9 = 44% Division’s asset weight to the corporation: Lodging = 2777. 4/4582. 7 = 0. 59 Contract = 1237. 7/4582. 7 = 0. 28 Restaurant = 567. 6/4582. 7 = 0. 13 Risk free rate is 30 years T-Bond = 8. 95% (Lodging use long-term debt) Market Premium is the Spread between S&P 500 and long-term US bond = 7. 3% Debt rate premium above government = 1. 10% ?Lodging’s D/A = 0. 74 & Lodging’s E/A = 0. 26 We use Ramada Inns, Inc. as the comparable to find ? for Marriot’s lodging division. (E/A = 0. 35, ? E = 1. 36, and assuming ? D = 0) ? u[L] = (E/A)* ? E = 0. 35 * 1. 36 = 0. 476 ?[L] = [1 + (D/E) * (1-Tc)] * ? u[L] = [1 + (0. 74/0. 26)*(0. 56)] * 0. 476 ?[L] = 1. 23 Lodging’s R[D] = Rf + DRPAG = 8. 95% + 1. 10% = 10. 05% Lodging’s R[E] = Rf + ? [E] * (Rp) = 0. 0895 + 1. 23 * 0. 0743 = 18. 09% Cost of Capital for Lodging Division is:

WACC(Lodging) =R[L] = (1-Tc) * (D/A) * R[D] + (E/A) * R[E] = 0. 56 * 0. 74 * 0. 1005 + 0. 26 * 0. 1809 = 8. 86% Risk free rate is 1 years T-Bill = 6. 90% (Restaurant & Contract use shorter-term debt) Market Premium is the spread between S 500 and short-term US bond = 8. 47% Debt rate premium above government = 1. 80% Restaurant’s D/A = 0. 42 & Restaurant’s E/A = 0. 58 We use McDonald’s as the comparable to find ? for Marriot’s Restaurant division. (E/A = 77%, ? E = 0. 94, and assuming ? D = 0) ? u[R] = 0. 77 * 0. 94 = 0. 2 ?[R] = [1 + (0. 42/0. 58)*(0. 56)] * 0. 72 = 1. 02 Restaurant’s R[D] = 6. 90% + 1. 80% = 8. 70% Restaurant’s R[E] = 0. 069 + 1. 02 * 0. 0847 = 15. 5% Cost of Capital for Restaurant Division is: WACC(Restaurant) = R[R] = (1-Tc) * (D/A) * R[D] + (E/A) * R[E] = 0. 56 * 0. 42 * 0. 0870 + 0. 58 * 0. 155 = 11. 09% Risk free rate is 1 years T-Bill = 6. 90% (Restaurant & Contract use shorter-term debt) Market Premium is the spread between S 500 and short-term US bond = 8. 7% Debt rate premium above government = 1. 40% Because the lack of comparable for contract service division, we cannot use the comparable method to find the ? u[C]. Instead, we can compute the ? u[C] with the relationship of each division and the corporation. The ? of Contract division: ? u[M]* = W[L] * ? u[L] + W[C] * ? u[C] + W[R] * ? u[R] ? 0. 444 = 0. 59 * 0. 476 + 0. 28 * ? u[C] + 0. 13 * 0. 72 ? ?u[C] = 0. 25 ?[C] = [1 + (0. 4/0. 6)*(0. 56)] * 0. 25 = 0. 35 Contract’s R[D] = 6. 0% + 1. 40% = 8. 30% Contract’s R[E] = 0. 069 + 0. 35 * 0. 0847 = 9. 87% Cost of Capital for Contracting Division is: WACC(Contract) = R[C] = (1-Tc) * (D/A) * R[D] + (E/A) * R[E] = 0. 56 * 0. 40 * 0. 083 + 0. 60 * 0. 0987 = 7. 79% Marriot’s cost of capital is the weighted average of the cost of company debt and the cost of company equity, which is mathematically the same as the weighted-average of the divisional costs of capital weighted based on net identifiable assets.