Marriott corporation cost of capital

In summary, the risk that Marriott will be assuming will increase over time as it continues to approve high risk projects.

Are the four components of marriotts financial strategy consistent with its growth objective?

We use long term U. Then, the cost of capital for the lodging and restaurant divisions of Marriott is 6. If Marriott was to use a single corporate hurdle rate then they will be using the After that, we used total sales of those companies to calculate a weighted average unlevered beta of those comparable companies. We believed that the longer the time period of data, the better and the more exact information. Since we had the amount of unlevered beta for the hotel as a whole and for the lodging and restaurant divisions, we used this information to solve for the unlevered beta of the contract services division. Approach First of all, we will determine the cost of debt Rd , cost of equity Re and the capital structure for the whole company. In April , VP of project finance, Dan Cohrs suggested that the divisional hurdle rates at the company would have a key impact on their future financial and operating strategies. The cost of debt for restaurant is its debt rate premium above government plus 1 year government interest rate and that is 8. Thus, assets should be the best item to weight the unlevered beta. Using a higher rate will result in a negative NPV as well as a reduced cash flow. We use the short term treasury bill returns from for restaurants and contract services as the risk-free rate which is 3. Information based on the short period might be distorted from such factors as inflation or economic crisis in some period of time. We can equate the cost of capital with risk, so therefore the risk in the lodging department is lower when compared with other departments that have a higher WACC.

To make the company managers more involved in its financial strategies, Marriott also considered using the hurdle rates for determining the incentive compensations. The cost of debt for Marriott is the debt rate premium above government plus 30 year government interest rate and it is Next, we used the equity beta of those firms to calculate unlevered beta.

marriott corporation the cost of capital recommendations

First, we chose the companies in the same line of business of each division lodging and restaurant. The beta for each division was measured by calculating the lever beta using an average unlevered beta of the comparablecompanies.

Marriott intended to continue its growth at a fast pace by relying on the best opportunities arising from their lodging, contract services and restaurants lines of businesses.

As shown in the Exhibit 4, the return rates in each period of time are rather fluctuated.

Marriott corporation cost of capital

Thus, return rate that is based on the longest period should be the best representative of the rate to be used. We can equate the cost of capital with risk, so therefore the risk in the lodging department is lower when compared with other departments that have a higher WACC. If Marriott was to use a single corporate hurdle rate then they will be using the The beta for each division was measured by calculating the lever beta using an average unlevered beta of the comparablecompanies. Thus, assets should be the best item to weight the unlevered beta. Projects from the restaurant and contract service division will be approved since they are evaluated at a lower rate than the determined cost of these various divisions. Then we can get the tax rate to calculate the WACC for the whole company. Since we had the amount of unlevered beta for the hotel as a whole and for the lodging and restaurant divisions, we used this information to solve for the unlevered beta of the contract services division. As shown in the Exhibit 4, the return rates in each period of time are rather fluctuated. We use the short term treasury bill returns from for restaurants and contract services as the risk-free rate which is 3. Using a higher rate will result in a negative NPV as well as a reduced cash flow. The cost of debt for Marriott is the debt rate premium above government plus 30 year government interest rate and it is Marriott intended to continue its growth at a fast pace by relying on the best opportunities arising from their lodging, contract services and restaurants lines of businesses. To estimate the equity costs of this division without comparable companies, we did the mathematics based on the financial report Exhibit 2. After finding out the cost of debt and the fraction of debt for lodging and restaurant divisions, we will be able to calculate the WACC at each of the two divisions.

We calculate the cost of debt based on the information provided in table A and table B. The reason is that the company or the division normally uses cost of capital to purchase assets for the operation.

Marriott case study chegg

Then, the cost of capital for the lodging and restaurant divisions of Marriott is 6. However, WACC of the project should be considered and calculated separately for each division for different investments projects. Next, we used the equity beta of those firms to calculate unlevered beta. We can get the number as below evaluations: Marriott Rf 4. As shown in the Exhibit 4, the return rates in each period of time are rather fluctuated. The process to calculate the cost of capital is the same as what we did for other divisions. Marriott intended to continue its growth at a fast pace by relying on the best opportunities arising from their lodging, contract services and restaurants lines of businesses.

The cost of debt for restaurant is its debt rate premium above government plus 1 year government interest rate and that is 8.

Rated 7/10 based on 25 review
Download
Marriott Corporation: the Cost of Capital Essay Example