Marriott Corporation: Cost of Capital Case Questions Each Question carries 5 points
1) Discuss Marriott’s financial strategy – what are the opportunities, what are the risks. Why is the hurdle rate so important for Marriott? Do you see parallels with Marriott’s business model and any other firm in today’s lodging industry? – Adam
2) Calculate the WACC of Marriott as a whole. Justify your choice of numbers. Saunaz & Kaylee
a. What is the cost of equity?
b. What is Marriott’s cost of debt?
c. What is Marriott’s WACC?
3) Can Marriott use a single corporate hurdle rate to evaluate investment opportunities in each of its lines of business? Why not? What happens if they do? Liwen Liu
4) Calculate WACC of Marriott’s individual divisions. Justify your choice of numbers. Rohan & Kaylee
a. Lodging division
b. Restaurant division
c. Contract Services division (this requires some imagination)
1) Since the company is a going-concern with a long horizon, use long-term rates when estimating cost of debt for the entire company.
2) The relationship between asset beta and equity beta, where E is equity value and V is total value is given by: (This formula assumes debt-beta is zero.)
3) Assume a tax rate of 34%.
4) Arithmetic averages are better estimators of expected returns than geometric averages. Discuss this within your group and we will examine why in class.
5) Obtain the risk free rate from Table B and market risk premium from Exhibit 5.
6) Your report cannot exceed 5 pages in total. Handwritten reports will not be accepted
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