Mariott

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Marriott Corporation: Cost of Capital Analysis
In this paper, I shall attempt to determine the optimal cost of capital for Marriott Corporation using the WACC method and compare it against the cost of capital of a division with the firm to determine the implications of using a “firm wide” cost of capital Cost of Capital for the firm Based on the data given in the case, the beta equity for Marriott Corporation is currently set at 1.11. However, given the changes in the debt component in Marriott’s capital structure over the years, it is essential that we re-calculate the actual value of βequity using the unlevered beta βasset. For this purpose, we first use the average Debt/Total capital ratio for Marriott over the past 5 years as 0.497. Since Debt/Capital for the past 5 years is 0.497, the average D/E for this period is 0.988 (=0.497/0.503). Using the formula for unlevered beta, the beta for the asset can be calculated as,
( )

= as,

. Using the target debt to capital ratio for

Marriott as 0.60, we can re-calculate the equity ( )

Since we have the βequity, we can calculate the cost of equity using the CAPM as, Requity = Rf + βequity*(Rm – Rf) From the data, we use Rf as 8.95% and the equity risk premium as 7.43% (average spread between S&P 500 and long term US bonds). Substituting these values, we get the equity cost of capital as, Requity = .0895 + 1.273*(0.0743) = 18.40% To calculate cost of debt, we consider the spread over the long term US government bond as, Rdebt = .0895+0.0130=.1025 = 10.25% Therefore, the overall WACC can be calculated as, WACC = 0.60*(1-0.4410)*0.1025 + 0.40*0.1840 = 10.797% Cost of capital for individual divisions: Having considered the cost of capital for the entire firm, I also feel we should consider the cost of capital for each division individually. This is because each division could have a different risk associated…...

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