Professional Documents
Culture Documents
Mariott Corporation - Cost of Capital
Mariott Corporation - Cost of Capital
/Cost
Harvard Business School Case #298-101
Case Software #XLS096
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a
transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the per
Business School.
reproduced, stored in a retrieval system or
therwise—without the permission of Harvard
Table A Market Value-Target Leverage Ratios and Credit Spreads for Marriott and Its Divisions
Lodging 74 50 50 1.10%
Contract services 40 40 60 1.40%
Restaurants 42 25 75 1.80%
Table B U.S. Government Interest Rates, April 1988
Maturity Rate
30-year 8.95%
10-year 8.72
1-year 6.90
Contract
Company Lodging Service Restaurant
Tax Rate (t) 44.05% 44.05% 44.05% 44.05%
Cost of debt (rD ) 10.25% 10.05% 10.35% 10.75%
WACC 1 11.39%
Contract
Company Lodging Service Restaurant
Tax Rate (t) 44.05% 44.05% 44.05% 44.05%
Cost of debt (rD ) 10.25% 10.05% 10.35% 10.75%
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Summary of Operations
Sales $1,174.1 $1,426.0 $1,633.9 $1,905.7 $2,458.9 $2,950.5 $3,524.9 $4,241.7 $5,266.5 $6,522.2
Earnings before interest expense and income taxes 107.1 133.5 150.3 173.3 205.5 247.9 297.7 371.3 420.5 489.4
Interest expense 23.7 27.8 46.8 52.0 71.8 62.8 61.6 75.6 60.3 90.5
Income before income taxes 83.5 105.6 103.5 121.3 133.7 185.1 236.1 295.7 360.2 398.9
Income taxes 35.4 43.8 40.6 45.2 50.2 76.7 100.8 128.3 168.5 175.9
Income from continuing operationsa 48.1 61.8 62.9 76.1 83.5 108.4 135.3 167.4 191.7 223.0
Net income 54.3 71.0 72.0 86.1 94.3 115.2 139.8 167.4 191.7 223.0
Funds from continuing operationsb 101.2 117.5 125.8 160.8 203.6 272.7 322.5 372.3 430.3 472.8
a
The company’s theme park operations were discontinued in 1984.
b
Funds provided from continuing operations consist of income from continuing operations plus depreciation, deferred income taxes, and other items not currently affecting working capital.
c
Total capital represents total assets less current liabilities.
Exhibit 2 Financial Summary by Business Segment, 1982-1987 (millions of dollars)
Lodging
Contract Services
Restaurants
Arithmetic 1987
Average Equity Market Revenues
Company and Nature of Business Returna Betab Leveragec ($ billions)
0.6549
0.6536 LODGING
0.2835
0.2759
0.476 LODGING
1.392
1.305 RESTAURANT
0.5358 RESTAURANT
0.7524
0.7238 RESTAURANT
1.0428 RESTAURANT
Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987
Arithmetic Standard
Average Deviation
Source: Casewriter’s estimates based on data from the University of Chicago’s Center for Research in Securit
Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates, 1926-1987
Arithmetic Standard
Average Deviation
Source: Casewriter’s estimates based on data from the University of Chicago’s Center for Research in Security