Essay on Marriott Case

1315 Words Oct 15th, 2008 6 Pages
Executive Summary

We found the weighted average cost of capital for Marriott as a whole to be 9.68%.
The divisions of Lodging, Contract Services and Restaurants had WACCs of 8.14%, 13.33%, and 9.63% respectively.
The only variable between these divisions that remains consistent is the tax rate. Marriott has a target rate for each of the divisions’ capital structures, which affects their debt and equity betas. Also, there are stark differences between the betas in the segments, as well as the different assumptions a financial analyst must use when calculating risk-free and market rates for fixed and floating debt issuances.

In order to calculate the WACC, we first estimated the cost of debt using the specific guidelines and
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It is important to note that should we have used the weighted average for overall cost of debt, this would have been 8.52%.
Lodging, Contract Services and Restaurants came in at 8.31%, 8.82%, and 9.71% respectively.

Unlevering the Betas
When looking at the data in table 1, it becomes evident that the Lodging division has a higher debt % in capital than the Restaurant and Contract Services divisions. This number impacts the weighted averages of the divisions’ costs of debt, so we move forward to unlever the betas of Marriott and its competitors to examine more closely which beta should be applied in our WACC calculations.
We used the average spread of 8.47% between the S&P500 and the short-term Treasury bill for our market return benchmark rate, and continue to use 5.46% as our risk free rate. 34% was used as the tax rate as this was the highest corporate tax bracket at the time. By using the CAPM model, we plug in the equity betas for Marriott and its competitors to find their return on equity.

Using the above assumptions, we then calculate the percentage of debt over equity in order to understand how levered Marriott’s competitors are.
By using our costs of debt from table 1, we arrive at the debt betas which we use for our unlevered beta calculations. However, because of the difference between the peers' operations, we first have to estimate which cost of debt that would be relevant for each of the peers. Therefore the firms from the case

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