2. +
MARIOTT CORPORATION:
Financial Strategy
Manage rather than own hotel assets
Invest in projects that increase
shareholders value
Optimize the use of debt in capital
structure
Repurchase undervalued shares
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
3. +
THE ISSUE
CALCULATING WACC OF THREE
DIVISIONS
Lodging
Restaurant
Contract Services
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
4. +
CALCULATING WACC
To determine the opportunity cost of
capital for Marriot Corporation, three
inputs are required: debt capacity, debt
cost, and equity cost consistent with
the amount of debt.
The cost of capital depends on each
division.
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
8. +
The Cost of Equity
The Return on Equity (Re) was
calculated using the CAPM Model:
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
Re =
Risk Free Rate+
Beta*(Market Risk Premium)
9. +
The Cost of Equity
Risk Free rates employed in CAPM model:
30YR US Gov’t Interest Rate for the Lodging
Division due to the long-term assets required in
the business
10YR US Gov’t Interest Rate for the
Restaurant Division due to the medium term
assets required
1YR US Gov’t Interest Rate for the Contract
Services Division due to the very short terms
assets used in that business
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
10. +
Betas
Beta was re-levered for each division
using Hamada's equation and the
appropriate capital structure for the
division.
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
BL = BU * [1 + (1-T) * D / E]
12. +
The Cost of Equity
The Long term Market Risk
Premium and the Long term Risk
Free Rate were applied in the
calculations for greater accuracy in
the estimation of risk.
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
13. +
Debt Capacity and the Cost of Debt
The Premium of Company Debt over
Gov’t Interest Rates were obtained
from the case study and used to
calculate Rd.
Equity / Capital and Debt / Capital were
simply calculated using the known D/E
ratios.
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
14. +
Cost of Capital
WACC was calculated using the
standard equation:
WACC =
Re * E/C + Rd * D/C * (1-tax rate)
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
15. +
WACC OF
THE
DIVISIONS
Division WACC
LODGING 7.60%
RESTAURANT 7.32%
CONTRACT
SERVICES
7.81%
MARRIOTT
CORP.
7.73%
Final Results
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
16. +
WACC of the Divisions and
Consolidated
30/01/2015
Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
17. + GROUP 3
Jenni Bianchi
Toni Horn
Hervert Mendez
Lynette Mc Quiddy
Roshan Vaswani
Weiliang Zhang
30/01/2015 Marriott Corporation: The Cost of Capital
Corporate Finance - Professor Christopher Kummer
Notes de l'éditeur
I’ve never heard of an inverse hamada equation. I googled it but couldn’t find it. Maybe it’s just me. I would have just put using the formula for unlevered beta instead of inverse hamada equation, but either way, I’ll go with whatever you decide I tried to fix it on excel and put it here to show you how it would have looked but I couldn’t transfer it right. I’m not sure how you transferred this image. I tried dragging it and it did not look anywhere near how yours does. My numbers were all over the place.