Marriott Corporation Case Analysis

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Submitted By ashishg1986
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Dan Cohrs, vice president of finance at the Marriott Corporation has to prepare his annual recommendations for the hurdle rates for the firm’s three major lines of business – lodging, contract services and restaurants. He recognizes that the hurdle rates are going to have a significant impact on the firm’s financial and operational strategies. If hurdle rates increased, Marriott’s growth would be reduced as once profitable projects wouldn’t remain so. While on the other hand, decease in hurdle rates would accelerate the firm’s growth trajectory. So it is very important for Dan to make appropriate recommendations for the divisional hurdle rates as this could influence project investment decisions to a great extent.
When determining the appropriate discount rate for a project, firm should understand that what investors care about is if the project earns a higher return than it could earn elsewhere on an investment with similar risk level. The appropriate beta  should be considered for a particular project and not of the entire firm because different projects in a firm can have different betas as they represent different levels of investment with different risks. Once you have the project you can use the CAPM equation to calculate the cost of equity rE as: rE = rf + *(rm - rf) where rf – risk free rate and (rm - rf) – risk premium
Once cost of equity is calculated, weighted average cost of capital can be calculated as below:
WACC = (1-T)*(D/D+E)*rD + rE * (D/D+E) where T – tax rate, D – market value of debt, E – market value of equity and rD – cost of debt
The biggest concern for Dan is to calculate the appropriate beta and thus discount rate for each of the three divisions separately instead of using the firm beta. The appropriate  for a project can come from looking at average s for the project’s industry. Using this approach, we will get different and…...

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