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MARRIOTT CORPORATION

COST OF CAPITAL

SOLUTION OF CASE STUDY


(CALCULATION OF COST OF CAPITAL)

SUBMITTED TO: DR. RAMEEZ UR REHMAN

SUBMITTED BY: ABDUL WAHAB


REG NO: DMG02181002
DATED: 8TH MARCH 2018
COST OF CAPITAL OF MARRIOTT CORPORATION

Calculation of Cost of Capital for Marriot Corporation


Marriot has three divisions:
 Lodging
 Restaurant
 Contract services
I have calculated cost of capital for company and for all division separately as well. Weighted average
cost of capital (WACC) is used for this purpose.

Financial Strategy of Marriott


The four key elements of Marriot`s financial strategy were the following:
 Manage rather than own hotel assets
 Invest in projects that increase shareholder value
 Optimize the use of debt in the capital structure
 Repurchase undervalued shares

Unlevered Beta (Asset Beta)


Unlevered beta is used to find caused of capital because unlevered beta compares the risk of an
unlevered company to the risk of the market. The unlevered beta is the beta of a company without
taking its debt into account. Unlevering a beta removes the financial effects of leverage. This number
provides a measure of how much systematic risk a firm's equity has when compared to the market.

Unlevering the beta removes any beneficial effects gained by adding debt to the firm's capital
structure. Comparing companies' unlevered betas gives an investor a better idea of how much risk he
is taking on when he purchases the stock. In finance, beta is the slope of the coefficient for a stock
regressed against a market index. Unlevered beta removes the impact of debt or leverage on the
regression.

WACC for Marriot Corporation


Levered equity beta = 0.97
Market leverage = 41 %
Unlevered asset beta = (1-0.41)*0.97 = 0.57
Target debt/value = 60 %
Levered equity beta = 0.57/(1-0.60) = 1.43
KE = Rf + beta *Risk premium
= 8.95 + 1.43 * 7.43 = 19.57%

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COST OF CAPITAL OF MARRIOTT CORPORATION

Kd = Rf + Debt Premium
Kd = 8.95 + 1.30 = 10.25%

WACC = 0.4*19.57+ (0.6*10.25*(1-0.44))


= 7.828 + 3.444

WACC Marriott= 11.27 %

WACC for Lodging

Asset Beta for Lodging


Leverage Eq. Beta Asset Beta
Hilton 0.14 0.88 0.76
Holiday 0.79 1.46 0.31
La Quinta 0.69 0.38 0.12
Ramada 0.65 0.95 0.34

Average asset beta = 0.383


Target debt/value = 0.74
Levered equity beta = 0.383/ (1-0.74) = 1.47

KE = Rf + beta *Risk premium


= 8.95 + 1.47 * 7.43 = 19.89%

Kd = Rf + Debt Premium
Kd = 8.95 + 1.10 = 10.05%

WACC = 0.26*19.89+0.74*10.05*(1-0.44)
= 5.17 + 4.16
WACC Lodging = 9.34 %

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COST OF CAPITAL OF MARRIOTT CORPORATION

WACC for Restaurants


Asset Beta for Restaurant

Leverage Eq. Beta Asset Beta


CFC 0.04 0.75 0.72
CFI 0.10 0.60 0.54
FR 0.06 0.13 0.12
LC 0.01 0.64 0.63
Mc 0.23 1.00 0.77
WI 0.21 1.08 0.85

Average asset beta = 0.61


Target debt/value = 0.42
Levered equity beta = 0.61/(1-0.42) = 1.05

KE = Rf + beta *Risk premium


= 8.95 + 1.05 * 7.43 = 16.75%

Kd = Rf + Debt Premium
Kd = 8.95 + 1.80 = 10.75%

WACC = 0.58*16.75 + 0.42*10.75*(1-0.44)

= 9.715 + 2.528
WACC Restaurants= 12.24 %

WACC for Contract Services


Asset Beta for Contract Services

There is no company mentioned in case other than Marriott which provides contract services.
Therefore to find beta of contract services I have considered the company as a portfolio of three
divisions. The asset beta of the whole company is weighted average of the asset betas of the divisions.
Weights should be the fraction of total equity value in each division.

𝑽 𝑽𝑹𝒆𝒔𝒕𝒖𝒂𝒓𝒂𝒏𝒕 𝑽𝑪𝒐𝒏𝒕𝒓𝒂𝒄𝒕 𝑺𝒆𝒓𝒗𝒊𝒄𝒆𝒔


𝜷𝒎𝒂𝒓𝒓𝒊𝒐𝒕𝒕 = 𝜷𝒍𝒐𝒅𝒈𝒊𝒏𝒈 (𝑽 𝒍𝒐𝒅𝒈𝒊𝒏𝒈 ) + 𝜷𝑹𝒆𝒔𝒕𝒖𝒂𝒓𝒂𝒏𝒕 ( ) + 𝜷𝑪𝒐𝒏𝒕𝒓𝒂𝒄𝒕 𝑺𝒆𝒓𝒗𝒊𝒄𝒆𝒔 ( )
𝑴𝒂𝒓𝒓𝒊𝒐𝒕𝒕 𝑽𝑴𝒂𝒓𝒓𝒊𝒐𝒕𝒕 𝑽𝑴𝒂𝒓𝒓𝒊𝒐𝒕𝒕

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COST OF CAPITAL OF MARRIOTT CORPORATION

𝟐𝟕𝟕𝟕. 𝟒 𝟓𝟔𝟕. 𝟔 𝟏𝟐𝟑𝟕. 𝟕


𝟎. 𝟓𝟕 = 𝟎. 𝟑𝟖 ∗ ( ) + 𝟎. 𝟔𝟏 ∗ ( )+𝒙∗( )
𝟒𝟓𝟖𝟐. 𝟕 𝟒𝟓𝟖𝟐. 𝟕 𝟒𝟓𝟖𝟐. 𝟕

𝟎. 𝟓𝟕 = 𝟎. 𝟐𝟑 + 𝟎. 𝟏𝟐𝟒 + 𝟎. 𝟐𝟕𝒙

𝟎. 𝟐𝟕𝒙 = 𝟎. 𝟐𝟏𝟔

𝟎. 𝟐𝟏𝟔
𝒙=
𝟎. 𝟐𝟕

𝒙 = 𝜷𝑪𝒐𝒏𝒕𝒓𝒂𝒄𝒕 𝑺𝒆𝒓𝒗𝒊𝒄𝒆𝒔 = 𝟎. 𝟖

Target debt/value = 0.40


Levered equity beta = 0.8/(1-0.40) = 1.33

KE = Rf + beta *Risk premium


KE= 8.95 + 1.33 * 7.43 = 18.86%

Kd = Rf + Debt Premium
Kd = 8.95 + 1.40 = 10.35%

WACC = 0.60*18.86+0.40*10.35*(1-0.44)
WACC = 11.32 + 2.32

WACC Contract Services= 13.64 %

FINAL RESULTS
S.No Description WACC (%)
1 Marriot 11.27
2 Lodging 9.34
3 Restaurants 12.24
4 Contract Services 13.64

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