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Case 1 FIN500 Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones, ale !

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Marriott Corporation: The Cost of Capital


Executive Summary J# illa$d Ma$$iott sta$ted Ma$$iott Co$po$ation in 1%&' (ith a $oot bee$ stand, e)panding it into a

leading lodging and *ood se$+i,e ,ompan- (ith sales o* o+e$ ./ billion b- 1%0'# 1t the time, Ma$$iott had th$ee main lines o* business, lodging, ,ont$a,t se$+i,es and $estau$ants, (ith lodging gene$ating about 512 o* ,ompan-3s p$o*its# The *ou$ "e- elements o* Ma$$iott3s *inan,ial st$ateg- (e$e managing hotel assets $athe$ than o(ning, in+esting in p$o4e,ts (ith the goal o* in,$easing sha$eholde$ +alue, optimi5ing the use o* debt, and $epu$,hasing thei$ unde$+alued sha$es# Ma$$iott Co$po$ation $elied on measu$ing the oppo$tunit- ,ost o* ,apital *o$ in+estments b- utili5ing the ,on,ept o* eighted 1+e$age

Cost o* Capital 6 1CC7# In 1p$il 1%00, 89 o* p$o4e,t *inan,e, :an Coh$s suggested that the di+isional hu$dle $ates at the ,ompan- (ould ha+e a "e- impa,t on thei$ *utu$e *inan,ial and ope$ating st$ategies# Ma$$iott intended to ,ontinue its g$o(th at a *ast pa,e b- $el-ing on the best oppo$tunities a$ising *$om thei$ lodging, ,ont$a,t se$+i,es and $estau$ants lines o* businesses# To ma"e the ,ompan- manage$s mo$e in+ol+ed in its *inan,ial st$ategies, Ma$$iott also ,onside$ed using the hu$dle $ates *o$ dete$mining the in,enti+e ,ompensations#

What is the weighted average cost of capital (WACC) for Marriott Corporation? 1CC ; 61 < =7$:6:>87 ? $@6@>87 : ; ma$"et +alue o* debt @ ; ma$"et +alue o* eAuit8 ; +alue o* the *i$m ; : ? @ $: ; p$eta) ,ost o* debt $@ ; a*te$ ta) ,ost o* debt = ; ta) $ate ; 1'5#%>B%0#% ; 442 Cost of Equity

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Case 1 < Ma$$iott Co$po$ation: The Cost o* Capital Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones, Ta$get debt $atio is /02C a,tual is 412 D@)hibit 1E Fs ; 1#11 Fu ; Fs > 61 ? 61 G =7 :>@7 ; 1#11>61 ? 61 G #447 6#4177 ; 0#00 Hsing the ta$get debt $atio o* /02: FT s ; Fu 61 ? 61 G =7 :>@7 ; #061 ? 61 G #447 6#/>#477 T Fs ;1#4'

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Hsing C19M: $* ; 0#%52 long<te$m $ate on H#S# go+e$nment bonds 6$m G $*7 ; '#4B2 a+e$age 1%&/<1%0' $@ ; $* ? FTs 6$m G $*7 ; 0#%52 ? 61#4'76'#4B27 ; 1%#0'2

Cost of Debt $: ; go+e$nment bond $ate ? ,$edit sp$ead ; 0#%52 ? 1#B02 ; 10#&52 1CC ; 61 < =7$:6:>87 ? $@61 < :>87 ; 61 G #447 6#10&576#/7 ? 6#1%0'76#47 ; 11.39%

f Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its line of !usiness" what would happen to the company over time?

1CC *o$ Ma$$iott; 11#B%2 1CC *o$ lodging di+ision ; %#&52 1CC *o$ $estau$ant di+ision ; 1B#042 1CC *o$ Ma$$iott3s ,ont$a,t di+ision ; &B#0'2

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Case 1 < Ma$$iott Co$po$ation: The Cost o* Capital Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones,

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The main use o* the hu$dle $ates is to assess in+estment de,ision in o$de$ to dete$mine i* it3s $easonable# Hsing di**e$ent $ates *o$ di**e$ent di+ision is also good, but one has to be ,a$e*ul (hen appl-ing a single ,ost o* ,apital a,$oss the +a$ious depa$tments#

Iased on the

1CCs stated abo+e *o$ the ,ompan- and its +a$ious depa$tments it3s ob+ious that the

+alues a$e di**e$ent# The ,ost o* ,apital *o$ lodging is lo(e$ than *o$ the enti$e ,ompan-, (hile that o* the othe$ depa$tments a$e highe$# e ,an eAuate the ,ost o* ,apital (ith $is", so the$e*o$e the $is" in the 1CC# I*

lodging depa$tment is lo(e$ (hen ,ompa$ed (ith othe$ depa$tments that ha+e a highe$

Ma$$iott (as to use a single ,o$po$ate hu$dle $ate then the- (ill be using the 11#B%2 $ate (hi,h is *o$ the enti$e ,ompan-# I- Ma$$iott using this $ate, then an- p$o4e,t that a$ises out o* the lodging di+ision (ill be $e4e,ted sin,e its ,ost o* ,apital o* %#&52 is lo(e$ than the ,ost o* ,apital *o$ the ,ompan-# Hsing a highe$ $ate (ill $esult in a negati+e N98 as (ell as a $edu,ed ,ash *lo(# 9$o4e,ts *$om the $estau$ant and ,ont$a,t se$+i,e di+ision (ill be app$o+ed sin,e the- a$e e+aluated at a lo(e$ $ate than the dete$mined ,ost o* these +a$ious di+isions# !+e$ time, Ma$$iott (ill be app$o+ing mo$e high $is" p$o4e,t *$om the $estau$ant and ,ont$a,t se$+i,e di+ision b- e+aluating them at a lo(e$ $ate, (hile the- (ill be $e4e,ting lo(e$ $is" p$o4e,ts *$om the lodging di+ision be,ause the- a$e using a highe$ $ate# In summa$-, the $is" that Ma$$iott (ill be assuming (ill in,$ease o+e$ time as it ,ontinues to app$o+e high $is" p$o4e,ts#

What is the WACC for the lodging division of Marriott?


Market Value Unle ere!

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Case 1 < Ma$$iott Co$po$ation: The Cost o* Capital Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones,
"e era#e
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$eta
; Fs > 61 ? 61 G =7 :>@7 =

$eta
Fs

Ta% &ate 44#00 44#00 44#00 44#00

Jilton JolidaKa Luinta Mamada Total ' era#e Unle ere! $eta

14#00 '%#00 /%#00 /5#00

0#'/ 1#B5 0#0% 1#B/

0#'0 0#4B 0#40 0#/' (.))

Fu ; 0#55 Cost of Equity Hsing the ta$get debt $atio o* '42: FTs ; Fu 61 ? 61 < =7 :>@7 FTs ; #55 61 ? 61 < #4476#'4>#&/77 FTs ; 1#4&' Hsing C19M: $@ ; $* ? FTs 6$m G $*7 ; 0#%52 ? 1#4&'6'#4B27 ; 1%#552 Cost of Debt $: ; go+e$nment bond $ate ? ,$edit sp$ead ; 0#%52 ? 1#102 ; 10#052 1CC ; 61 G =7$:6:>87 ? $@6@>87 ; 61 < #4476#100576#'47 ? 6#1%5576#&/7 * 9.+)% What is the WACC for the restaurant division Marriott?
Market Value "e era#e
:>8

$eta
Fs

Ta% &ate
=

Unle ere! $eta


; Fs > 61 ? 61 G =7 :>@7

Chu$,h3s Collins Foods F$is,h3s Kub-3s M,:onald3s end-3s Total ' era#e Unle ere! $eta

4#00 10#00 /#00 1#00 &B#00 &1#00

1#45 1#45 0#5' 0#'/ 0#%4 1#B&

44#00 44#00 44#00 44#00 44#00 44#00

1#4& 1#B' 0#55 0#'/ 0#01 1#15 1.(1

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Case 1 < Ma$$iott Co$po$ation: The Cost o* Capital Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones, Fu ; 1#01 Cost of Equity Hsing the ta$get debt $atio o* 4&2: FT s ; Fu 61 ? 61 G =7 :>@7 ;1#0161 ? 61 < #447N#4&>#507 ; 1#4&0 Hsing C19M: $@ ; $* ? FTs 6$m G $*7 ; 0#%52 ? 1#4&6'#4B27 ; 1%#502 Cost of Debt $: ; go+e$nment bond $ate ? ,$edit sp$ead ; 0#%52 ? 1#002 ; 10#'52 1CC ; 61 < =7$:6:>87 ? $@61 < :>87 ; 61 < #4476#10'576#4&7 ? 6#1%5076#507 ; 13.,-%

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What is the WACC for Marriott#s contract services division? Fu *o$ Ma$$iott is the (eighted a+e$age o* the :i+isional Fu3s:
.!entifiable 'ssets .&,'''#4 .5/'#/0 .1,&B'#'0 .4,50&#'0 &atio 0#/1 0#1& 0#&' $eta Unle ere! 0#55 1#01 0#00

Kodging Mestau$ants Cont$a,t Se$+i,es

#/16#557 ? #1&61#017 ? #&'6Fu7 ; #00 Fu ; &#514 Cost of Equity Hsing the ta$get debt $atio o* 402: FT s ; Fu 61 ? 61 G =7 :>@7 ; &#514 61 ? 61 G #447 6#4>#/77 ; B#45

Hsing C19M:

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Case 1 < Ma$$iott Co$po$ation: The Cost o* Capital Team 4: Jesse Galindo, Sulabh Gupta, Maggie Jones, $@ ; $* ? FTs 6$m G $*7 ; 0#%52 ? B#456'#4B27 ; B4#502

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Cost of Debt $: ; go+e$nment bond $ate ? ,$edit sp$ead $: ; 0#%52 ? 1#402 ; 10#B52 1CC ; 61 < =7$:6:>87 ? $@6@>87 ; 61 < #4476#10B576#47 ? 6#B45076#/7 * +3.(/%

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