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Marriot Corporation

Cost of Capital
Team ʹ involved in the project
201 - Aaron Dsouza
202 ʹ Abhishek Podar
204 ʹ Amit Dhamapurkar
205 ʹ Amit Bhimrajka
206 ʹ Apeksha Maniar
207 ʹ Chandni Dev
208 ʹ Chetan Devadiga
209 ʹ Dev Gandhi
210 ʹ Devarsh Mapuskar
211 ʹ Kunal Doshi
Presentation Outline
ͻ Company Back Ground
ʹ Marriott ʹ Lines of Businesses
ʹ Marriott ʹ Strategy ʹ Business & Financial
ͻ Key Concepts
ʹ Hurdle Rate
ʹ WACC
ͻ Case Background
ͻ Case Details
ʹ WACC for Marriott
ʹ WACC for Marriott ʹ Different lines of Business
ͻ Conclusions
Company Background
ͻ Marriott was incorporated in 1927
ͻ Began with J. Willard Marriott͛s root beer stand
ͻ Grew into one of the leading lodging and food service companies
ͻ Lines of business:
Lodging ( 361 hotels & 100000 rooms )
Contract services
Restaurants
ͻ Leading player in the lodging and food service business
ͻ Marriott intends to remain a premier growth company
Marriot Corporation Brand
I. Manage rather than own hotel assets
II. Invest in projects that increase shareholder value
III. Optimize the use of debt in the capital structure
IV. Repurchase undervalued share
Elements of Financial Strategy
7
54.3
71 72
86.1
94.3
115.2
139.8
167.4
191.7
223
0
50
100
150
200
250
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Net Income
183.6
160.5
125.3
130.8 132.8 134.4
128.8 131 130.6
118.8
0.25
0.34
0.45
0.57
0.61
0.78
1
1.24
1.4
1.67
0
0.5
1
1.5
2
0
50
100
150
200
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Per Share Data
Shares outstanding (in millions) EPS
S
N
A
‡Sales grew from $ 1.1 Billion to $ 6.5 Billion
‡Profits have grown from $ 54 Million to $ 223 Million
P
S
H
‡Return to Equity ± 22%
‡Cash Dividend grew from $ 0.026 to $ 0.17
O
T
‡Proportion of Debt in the Capital Structure has
increased from 37.5% to 58.8%
Financial Summary
8
Segmental Summary
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
7000.00
1982 1983 1984 1985 1986 1987
Sales
0
100
200
300
400
500
600
1982 1983 1984 1985 1986 1987
Operating profit
Lodging Contract Services Restaurants
0
1000
2000
3000
4000
5000
1982 1983 1984 1985 1986 1987
Identifiable assets
0
200
400
600
800
1000
1200
1400
1600
1982 1983 1984 1985 1986 1987
Capital expenditure
ͻ Selection of investment project by discounting expected cash flow at hurdle rate for each
divisions.
ʹ Hurdle rate is the minimum rate of return that must be met for a company to undertake
a particular project.
For example,
Hurdle Rates
-20%
-10%
0%
10%
20%
30%
40%
50%
1 2 3 4 5 6
Typical Hotel Profit and Hurdle
rates
Hurdle rate
Profit rate
ͻ Intend to remain premier growth company:
Aggressively developing appropriate
opportunities within existing line of
business
To become preferred employer, preferred
provider and the most profitable company
in existing lines of business
Goal
Case study -
Determine the WACC for the Company as a whole
and for each of the divisions
ͻ Company measures opportunity cost of capital for investment with similar risk using the
Weighted Average Cost of Capital.
ͻ It is an average representing the expected return on the company's securities, each source of
capital such as bond, stock and debts is weighted in comparison with the prominence in the
company capital structure
ͻ WACC is a critical figure in assessing a company͛s financial health for internal (capital
budgeting) as well as external (Valuation / investment) purpose.
ͻ WACC requires that a firm multiplies the cost of each element of capital (equity / debt /
preferred stock) by its percentage of total capital and then add it together to provide the
overall Cost of Capital
Weighted Average Cost of Capital
ͻ Company measures opportunity cost of capital for investment with similar risk
using the Weighted Average Cost of Capital.
WACC - Formula
´ ) ´ )
V
E
K
V
D
K T WACC
E D
+ = ) 1 (
Where
T = corporate tax rate
KD = cost of debt
D/V = % of debt financing
KE = cost of equity
E/V = % of equity financing
KD = Government rate of
borrowing + Premium
above Government Rate
Where
T = corporate tax rate
KD = cost of debt
D/V = % of debt financing
KE = cost of equity
E/V = % of equity financing
KD = Government rate of
borrowing + Premium
above Government Rate
ͻ Cost of Debt
ͻ Risk ʹ Free Rate
ͻ Risk Premium
ͻ Cost of Equity
ͻ Risk ʹ Free Rate
ͻ Market risk Premium
ͻ Beta
ͻ Tax rate
ͻ Cost of Debt
ͻ Risk ʹ Free Rate
ͻ Risk Premium
ͻ Cost of Equity
ͻ Risk ʹ Free Rate
ͻ Market risk Premium
ͻ Beta
ͻ Tax rate
Cost of Debt - Marriott
% Debt % Floating % Fixed
Premium >
Gov͛t
MARRIOTT 60% 40% 60% 1.30%
Lodging 74% 50% 50% 1.10%
Contract 40% 40% 60% 1.40%
Restaurant 42% 25% 75% 1.80%
Table A
Table B
Maturity Rate Applies to
30-year 8.95% Lodging
10-year 8.72% Contract & Restaurant
1-year 6.90%
The effective rate that a company
pays on its current debt. This can be
measured in either before- or after-
tax returns; however, because
interest expense is deductible, the
after-tax cost is seen most
often. This is one part of the
company's capital structure, which
also includes the cost of equity.
Cost of Debt KD :
ʹ Government rate of Borrowing +
premium above Government rate (refer
Table: A and B)
ʹ KD = 8.95% + 1.30%
ʹ KD = 10.25%
Cost of Equity - Marriott
ͻ Step 1
ͻ Riskless rate = Rf 8.95% (Table B)
ͻ Risk premium: (Exhibit 4 / 5)
= Stock Index (12.01%)
- LT Gov͛t Bonds (4.58%
ͻ RPm= 7.43%
14
CAPM : Cost of Equity
(Ke) = rf + ɴ (RPm)
Needed :
Risk Free Rate = rf
Market Risk Premium = RPm
Beta = ɴ
´ ) 0.5723 59 . 97 . 0
: 0
zero is Debt of Beta assume we Beta, Asset red For Unleve
= - =
¦
¦
'
+

'

=
=
¦
¦
'
+

'

+
¦
¦
'
+

'

=
A
A
E A
D
A
E
A
D A
V
E
V
E
V
D
F
F F
F
F F F
ͻ Step 2
ͻ Target capital structure (Table A)
D
T
/V= 0.60
ͻ Actual capital structure (Exhibit 1)
ʹ D
A
/V= 0.41 =2498.8/(2498.8 + $30*118.8)
ͻ Marriott͛s capital structure т target
ͻ Levered equity beta (Exhibit 3)
ʹ ɴ
E
=0.97
Cost of Equity: Unlever Beta Cost of Equity: Unlever Beta (Marriott)
EPS & O/s Share in Market
ͻ Unlevered asset beta = 0.5723
ͻ Target debt/value = 0.60
ͻ Target Equity Value = 0.40
ͻ Levered Equity Beta:
ͻ Levered Equity Beta = ɴ
E
= 1.43
4307 . 1
) 5723 . 0 (
.40
1

=
¦
'
+

'

=
¦
'
+

'

=
L
E
A
T
L
E
E
V
F
F F
Cost of Equity: Leverage Beta (Marriott) Cost of Equity: Leverage Beta (Marriott)
ͻ KE = rF + ɴE x RPM
ͻ KE = 8.95% + 1.43 * 7.43%
ͻ KE = 19.57%
‡ WACC = (1 - T)(D/V)K
D
+ (E/V)K
E
‡ WACC = (1-0.44)(.60)(10.25%)
+ (.40)(19.57%)
‡ WACC = 3.44% + 7.83%
‡ WACC
M
= 11.273%
Cost of Equity & Marriott͛s WACC Cost of Equity & Marriott͛s WACC
ͻ Lodging
ͻ Restaurants
ͻ Contract Services
18
Individual Businesses Individual Businesses
ͻ Target weights : 74% debt; 26% equity
ͻ Cost of debt
ʹ K
D
= 8.95% + 1.10% = 10.05%
Cost of Debt Cost of Debt - - Lodging Lodging
ͻ Step 2
ͻ Unlevered asset beta = 0.38
ͻ Target debt/value = .74 (from table A)
ͻ Levered Equity Beta:
ͻ Be= (V/Et)*BA
= (1/0.26)*0.38
= 3.85*0.38
= 1.45548
ͻ Levered Equity Beta = ɴ
E
= 1.46
Leveraged Beta (Lodging) Leveraged Beta (Lodging)
ͻ Step 3
ͻ K
E
= r
F
+ ɴ
E
x RP
M
ͻ K
E
= 8.95% + 1.46 * 7.43%
ͻ K
E
= 19.76%
LODGING
From Exhibit 3 Calculations
Revenues
(in Billion)(b)
Market Leverage (c)
Levered
Equity Beta (d)
Unlevered
Asset Beta
(Book Value of Debt
divided by book value of
the Debt + market value of
equity)
= D* X (1-C*)
Hilton Hotels 0.77 0.14 0.88 0.76
Holiday Corp 1.66 0.79 1.46 0.31
LaQuinta Motor Inns 0.17 0.69 0.38 0.12
Ramada Inns 0.75 0.65 0.95 0.33
Average unlevered asset Beta: 0.38
21
WACC Lodging WACC Lodging
Average unlevered asset Beta:
S.No Description Value Reference
A
Government Interest Rate 8.95%
Table B
B Debt Premium 1.10% Table A
C Cost of Debt 10.05% A+B
D
E Risk Premium Equity 7.43% Exhibit 5
F Unlevered Asset Beta 0.38 Calculated Above
G Levered Equity Beta 1.46 ((1/0.26)*F)
H Cost of Equity 19.76% =A +E*G
I Target Debt Value 74%
J Target Equity Value 26%
K Tax Rate 44.00%
L WACC 9.30% =(1-T)*C*I + H*J
ͻ WACC = (1 - T)(D/V)K
D
+ (E/V)K
E
ͻ WACC = (1-.44)(.74)(10.05%)
+ (.26)(19.76%)
ͻ WACC = 4.16% + 5.14%
ͻ WACC = 9.30%
ͻ Lodging
ͻ Restaurants
ͻ Contract Services
22
Individual Businesses Individual Businesses
ͻ Target weights : 42% debt; 58 % equity
ͻ Cost of debt
ʹ K
D
= 8.72% + 1.80% = 10.52%
Cost of Debt Cost of Debt - - Restaurant Restaurant
Note : The appropriate government rate for Marriott Restaurants is the 10 yr government rate =
8.72%
ͻ Step 2 Lever Beta - Restaurant
ͻ Unlevered asset beta = 0.61
ͻ Target debt/value = .42 (from table A)
ͻ Levered Equity Beta:
ͻ Be= (V/Et)*BA
= (1/0.58)*0.61
= 1.72*0.61
= 1.0492
ͻ Levered Equity Beta = ɴ
E
= 1.05
Leveraged Beta Leveraged Beta - - Restaurant Restaurant
ͻ Step 3 Equity Cost -Restaurant
ͻ K
E
= r
F
+ ɴ
E
x RP
M
ͻ K
E
= 8.72% + 1.05 * 8.47%(from Exhibit 5)
ͻ K
E
= 17.58%
Restaurant
From Exhibits 3
Sales (b)
Market Value Levered Unlevered
Leverage (1) Equity Beta Asset Beta (2)
Church's Fried Chicken 0.39 0.04 0.75 0.72
Collins Foods 0.57 0.10 0.6 0.54
Frisch's 0.14 0.06 0.13 0.12
Luby's 0.23 0.01 0.64 0.63
McDonald's 4.89 0.23 1 0.77
Wendys 1.05 0.21 1.08 0.85
Average unlevered asset Beta: 0.61
25
‡ WACC = (1 - T)(D/V)K
D
+ (E/V)K
E
‡ WACC = (1-.44)(.42)(10.52%) + (.58)(17.58%)
‡ WACC = 12.67%
WACC WACC - - Restaurant Restaurant
S.No Description Value Reference
A
Government Interest Rate
8.72% Table B
B Debt Premium 1.80% Table A
C Cost of Debt 10.52% A+B
D
E Risk Premium Equity 8.47% Exhibit 5
F
Unlevered Asset Beta
0.61 Calculated Above
G Levered Equity Beta 1.05 ((1/J)*F)
H Cost of Equity 17.58% =A +E*G
I Target Debt Value 42%
J Target Equity Value 58%
K Tax Rate 44.00%
L WACC 12.67% =(1-T)*C*I + H*J
ͻ Lodging
ͻ Restaurants
ͻ Contract Services
Individual Businesses Individual Businesses
ͻ Target weights : 40% Debt; 60 % Equity
ͻ Cost of debt
ʹ K
D
= 8.72% + 1.40% = 10.12%
Cost of Debt Cost of Debt ʹ ʹ Contract Service Contract Service
Note : The appropriate government rate for Marriott Restaurants is the 10 yr government rate =
8.72%
28
Restaurant
From Exhibits 3
Sales (b)
Market Value Levered Unlevered
Leverage (1) Equity Beta Asset Beta (2)
Church's Fried Chicken 0.39 0.04 0.75 0.72
Collins Foods 0.57 0.10 0.6 0.54
Frisch's 0.14 0.06 0.13 0.12
Luby's 0.23 0.01 0.64 0.63
McDonald's 4.89 0.23 1 0.77
Wendys 1.05 0.21 1.08 0.85
Average unlevered asset Beta: 0.61
Leveraged Beta Leveraged Beta ʹ ʹ Contract Service Contract Service
ͻ Step 2 Lever Beta - Restaurant
ͻ Unlevered asset beta = 0.61
ͻ Target debt/value = .40 (from table A)
ͻ Levered Equity Beta:
ͻ Be= (V/Et)*BA
= (1/0.60)*0.61
= 1.67*0.61
= 1.01
ͻ Levered Equity Beta = ɴ
E
= 1.01
ͻ Step 3 Equity Cost -Restaurant
ͻ K
E
= r
F
+ ɴ
E
x RP
M
ͻ K
E
= 8.72% + 1.01 * 8.47%(from Exhibit 5)
ͻ K
E
= 17.27%
Leveraged Beta Leveraged Beta - - Restaurant Restaurant
‡ WACC = (1 - T)(D/V)K
D
+ (E/V)K
E
‡ WACC = (1-.44)(.40)(10.12%) + .60)(17.27%)
‡ WACC = 2.266 + 10.362
‡ WACC = 12.63%
30
S.No
Description
Marriott Lodging Restaurants Contract Svcs
A Sales 6,522.20 2,673.30 2,969.00 879.90
B Contribution 100% 41% 46% 13%
C Profit 516.90 263.9 170.6 82.4
D Contribution 100% 51% 33% 16%
E Debt Type Long Term Long term Short term Short Term
F Government Interest Rate 8.95% 8.95% 8.72% 8.72%
G Debt Premium 1.30% 1.10% 1.80% 1.40%
H Cost of Debt 10.25% 10.05% 10.52% 10.12%
I Stock Index 12.01% 12.01% 12.01% 12.01%
J LT Govt Bonds 4.58% 4.58% 3.54% 3.54%
K Risk Premium Equity 7.43% 7.43% 8.47% 8.47%
L Unlevered Asset Beta 0.572 0.378 0.607 0.987
M Levered Equity Beta 1.43 1.46 1.05 1.65
N Cost of Equity 19.57% 19.76% 17.58% 22.65%
O Target Debt Value 60% 74% 42% 40%
P Target Equity Value 40% 26% 58% 60%
Q Tax Rate 44.00% 44.00% 44.00% 44.00%
R WACC 11.27% 9.30% 12.67% 12.63%
Marriott Marriott - - Summary Summary
31
S.No Description Marriott Lodging Restaurants Contract Svcs
H
Cost of Debt
10.25% 10.05% 10.52% 10.12%
L
Unlevered Asset Beta
0.572 0.378 0.607 0.987
M
Levered Equity Beta
1.43 1.46 1.05 1.65
N
Cost of Equity
19.57% 19.76% 17.58% 22.65%
O
Target Debt Value
60% 74% 42% 40%
P
Target Equity Value
40% 26% 58% 60%
Q
Tax Rate
44.00% 44.00% 44.00% 44.00%
R
WACC
11.27% 9.30% 12.67% 12.63%
ͻ Cost of Debt is lower as compared to Cost of Equity
ͻ Marriott would prefer to get additional investment in form of debt rather than equity
ͻ Higher the Value of Equity in Capital Structure, the higher the WACC and lower the
profitability
ͻ WACC of lodging is least , so it is most profitable investment for Marriott and can generate
max CF viz-a-viz for contract services
ͻ As far as project is concerned , contract service has maximum risk (equity beta = 1.65) and
restaurant has minimum risk (equity beta = 1.05) for Marriott
Conclusion Conclusion

Team involved in the project

201 - Aaron Dsouza 202 Abhishek Podar 204 Amit Dhamapurkar 205 Amit Bhimrajka 206 Apeksha Maniar 207 Chandni Dev 208 Chetan Devadiga 209 Dev Gandhi 210 Devarsh Mapuskar 211 Kunal Doshi

Presentation Outline

Company Back Ground Marriott Lines of Businesses Marriott Strategy Business & Financial Key Concepts Hurdle Rate WACC Case Background Case Details WACC for Marriott WACC for Marriott Different lines of Business Conclusions

Company Background Marriott was incorporated in 1927 Began with J. Willard Marriott s root beer stand Grew into one of the leading lodging and food service companies Lines of business: Lodging ( 361 hotels & 100000 rooms ) Contract services Restaurants Leading player in the lodging and food service business Marriott intends to remain a premier growth company .

Marriot Corporation Brand .

Manage rather than own hotel assets Invest in projects that increase shareholder value Optimize the use of debt in the capital structure Repurchase undervalued share . IV. II. III.Elements of Financial Strategy I.

5 1 0.8 1 0.4 128.8 134.45 2 1.7 167.8 132.8 115.Financial Summary Net Income 250 200 150 100 54.17 ‡Proportion of Debt in the Capital Structure has increased from 37.25 0.6 160.5 Billion ‡Profits have grown from $ 54 Million to $ 223 Million P S H ‡Return to Equity ± 22% ‡Cash Dividend grew from $ 0.8 1.2 191.57 0.67 131 1.4 223 Per Share Data 200 150 100 50 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Shares outstanding (in millions) EPS 0.3 50 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 71 72 86.6 118.61 0.026 to $ 0.24 130.8% O T 7 .3 139.5 1.1 94.5 0 S N A ‡Sales grew from $ 1.4 125.3 130.78 0.5% to 58.1 Billion to $ 6.34 183.

00 5000.00 1982 1983 1984 1985 1986 1987 Operating profit 5000 4000 3000 2000 1000 0 1982 1983 1984 1985 1986 1987 1600 1400 1200 1000 800 600 400 200 0 1982 Identifiable assets 1983 1984 Sales 1985 1986 1987 8 Capital expenditure .00 1000.00 2000.00 4000.Segmental Summary Lodging 600 500 400 300 200 100 0 1982 1983 1984 1985 1986 1987 Contract Services Restaurants 7000.00 6000.00 0.00 3000.

Hurdle rate is the minimum rate of return that must be met for a company to undertake a particular project. Typical Hotel Profit and Hurdle rates 50% 40% 30% 20% 10% 0% -10% -20% 1 2 3 4 5 6 Hurdle rate Profit rate . For example.Hurdle Rates Selection of investment project by discounting expected cash flow at hurdle rate for each divisions.

Goal Intend to remain premier growth company: Aggressively opportunities business developing appropriate within existing line of To become preferred employer. preferred provider and the most profitable company in existing lines of business Case study Determine the WACC for the Company as a whole and for each of the divisions .

each source of capital such as bond.Weighted Average Cost of Capital Company measures opportunity cost of capital for investment with similar risk using the Weighted Average Cost of Capital. It is an average representing the expected return on the company's securities. stock and debts is weighted in comparison with the prominence in the company capital structure WACC is a critical figure in assessing a company s financial health for internal (capital budgeting) as well as external (Valuation / investment) purpose. WACC requires that a firm multiplies the cost of each element of capital (equity / debt / preferred stock) by its percentage of total capital and then add it together to provide the overall Cost of Capital .

WACC . WACC! (1T)KD D  KE E V V Where T = corporate tax rate KD = cost of debt D/V = % of debt financing KE = cost of equity E/V = % of equity financing KD = Government rate of borrowing + Premium above Government Rate .Formula Company measures opportunity cost of capital for investment with similar risk using the Weighted Average Cost of Capital.

.

Cost of Debt Risk Free Rate Risk Premium Cost of Equity Risk Free Rate Market risk Premium Beta Tax rate .

% Debt MARRIOTT Lodging Contract Restaurant Table B Maturity 30-year 10-year 1-year 60% 74% 40% 42% % Floating 40% 50% 40% 25% % Fixed 60% 50% 60% 75%  Cost of Debt KD : Rate 8.95% 8.Cost of Debt . however.90% Applies to Lodging Contract & Restaurant Government rate of Borrowing + premium above Government rate (refer Table: A and B) KD = 8.or aftertax returns.95% + 1.80% also includes the cost of equity. which 1.72% 6.Marriott Table A The effective rate that a company Premium > pays on its current debt.40% company's capital structure. the 1.30% KD = 10. because 1.10% after-tax cost is seen most often. This is one part of the 1.30% interest expense is deductible.25% . This can be Gov t measured in either before.

01%) .95% (Table B) Risk premium: (Exhibit 4 / 5) = Stock Index (12.58% 14 RPm= 7.LT Gov t Bonds (4.Marriott CAPM : Cost of Equity (Ke) = rf + (RPm)     Needed : Risk Free Rate = rf Market Risk Premium = RPm Beta = Step 1 Riskless rate = Rf 8.43% .Cost of Equity .

8 + $30*118.97 v .60 Actual capital structure (Exhibit 1) DA/V= 0.97 EPS & O/s Share in Market ¨ DA ¸ ¨ EA ¸ FA ! FD© ¹ © V ¹  FE © V ¹ ¹ © º ª º ª For Unlevered Asset Beta.41 =2498.8/(2498.Cost of Equity: Unlever Beta (Marriott) Step 2 Target capital structure (Table A) DT/V= 0. we assume Beta of Debt is zero @FD ! 0 : ¨ EA ¸ FA ! FE © ¹ © V ¹ º ª F A ! 0.8) Marriott s capital structure target Levered equity beta (Exhibit 3) E=0.

59 ! 0.5723 ..

40 Levered Equity Beta: F L E F L E ¨ V ! © E T ª ¨ 1 ! © ª .Cost of Equity: Leverage Beta (Marriott) Unlevered asset beta = 0. 4307 E ¸ ¹ F A º ¸ ¹ ( 0 .5723 Target debt/value = 0.43 .60 Target Equity Value = 0.40 ! 1 . 5723 º ) Levered Equity Beta = = 1.

273% .95% + 1.25%) + (.60)(10.T)(D/V)KD + (E/V)KE WACC = (1-0.57% ‡ ‡ ‡ WACC = (1 .43% KE = 19.40)(19.83% ‡ WACCM = 11.44% + 7.Cost of Equity & Marriott s WACC KE = rF + E x RPM KE = 8.43 * 7.44)(.57%) WACC = 3.

Individual Businesses Lodging Restaurants Contract Services 18 .

10% = 10.Cost of Debt . 26% equity Cost of debt KD = 8.Lodging Target weights : 74% debt.05% .95% + 1.

38 Target debt/value = .26)*0.38 0.17 0.77 1.95% + 1.46 0.38 Step 2 Unlevered asset beta = 0.33 0.69 0.66 0.88 1.76 0.65 Levered Equity Beta (d) = D* X (1-C*) Calculations Unlevered Asset Beta Hilton Hotels Holiday Corp LaQuinta Motor Inns Ramada Inns 0.45548 Step 3 KE = rF + E x RPM KE = 8.38 = 1.79 0.85*0.14 0.43% KE = 19.12 0.76% Levered Equity Beta = E = 1.31 0.Leveraged Beta (Lodging) From Exhibit 3 Market Leverage (c) LODGING Revenues (in Billion)(b) (Book Value of Debt divided by book value of the Debt + market value of equity) 0.46 * 7.75 0.74 (from table A) Levered Equity Beta: Be= (V/Et)*BA = (1/0.38 = 3.46 .95 Average unlevered asset Beta: 0.

44)(.38 1.74)(10.T)(D/V)KD + (E/V)KE WACC = (1-.10% 10.46 19.WACC Lodging WACC = (1 .16% + 5.26)(19.00% 9.30% =(1-T)*C*I + H*J 7.76% 74% 26% 44.05% Reference Table B Table A A+B 21 .43% Exhibit 5 Calculated Above ((1/0.26)*F) =A +E*G Description Government Interest Rate Debt Premium Cost of Debt Value 8.No A B C D E F G H I J K L Risk Premium Equity Unlevered Asset Beta Levered Equity Beta Cost of Equity Target Debt Value Target Equity Value Tax Rate WACC 0.76%) WACC = 4.95% 1.14% WACC = 9.05%) + (.30% Average unlevered asset Beta: S.

Individual Businesses Lodging Restaurants Contract Services 22 .

Cost of Debt .52% Note : The appropriate government rate for Marriott Restaurants is the 10 yr government rate = 8.72% + 1.72% .Restaurant Target weights : 42% debt.80% = 10. 58 % equity Cost of debt KD = 8.

58% Levered Equity Beta = E = 1.72 0.Leveraged Beta .63 0.64 1 1.89 1.85 0.23 0.61 Average unlevered asset Beta: Step 2 Lever Beta .72% + 1.Restaurant Unlevered asset beta = 0.14 0.04 0.13 0.05 .0492 Step 3 Equity Cost -Restaurant KE = rF + E x RPM KE = 8.Restaurant From Exhibits 3 Restaurant Sales (b) Church's Fried Chicken Collins Foods Frisch's Luby's McDonald's Wendys 0.61 = 1.42 (from table A) Levered Equity Beta: Be= (V/Et)*BA = (1/0.77 0.6 0.08 Unlevered Asset Beta (2) 0.05 Market Value Leverage (1) 0.61 = 1.57 0.12 0.54 0.01 0.10 0.58)*0.05 * 8.47%(from Exhibit 5) KE = 17.23 4.61 Target debt/value = .72*0.39 0.21 Levered Equity Beta 0.75 0.06 0.

52%) + (.00% 12.80% 10.No A B C D E F G H I J K L Risk Premium Equity 8.58% 42% 58% 44.72% 1.58%) ‡ WACC = 12.T)(D/V)KD + (E/V)KE WACC = (1-.WACC .67% Description Government Interest Rate Debt Premium Cost of Debt Value 8.44)(.61 1.52% Reference Table B Table A A+B S.67% Exhibit 5 Calculated Above ((1/J)*F) =A +E*G Unlevered Asset Beta Levered Equity Beta Cost of Equity Target Debt Value Target Equity Value Tax Rate WACC =(1-T)*C*I + H*J 25 .05 17.Restaurant ‡ ‡ WACC = (1 .42)(10.47% 0.58)(17.

Individual Businesses Lodging Restaurants Contract Services .

60 % Equity Cost of debt KD = 8.40% = 10.12% Note : The appropriate government rate for Marriott Restaurants is the 10 yr government rate = 8.72% + 1.Cost of Debt Contract Service Target weights : 40% Debt.72% .

21 Levered Equity Beta 0.Restaurant Unlevered asset beta = 0.67*0.40 (from table A) Levered Equity Beta: Be= (V/Et)*BA = (1/0.85 0.89 1.54 0.72% + 1.01 28 .61 Target debt/value = .01 * 8.39 0.57 0.10 0.77 0.6 0.04 0.64 1 1.72 0.Leveraged Beta Contract Service From Exhibits 3 Restaurant Sales (b) Church's Fried Chicken Collins Foods Frisch's Luby's McDonald's Wendys 0.47%(from Exhibit 5) KE = 17.13 0.61 Average unlevered asset Beta: Step 2 Lever Beta .01 0.12 0.23 4.60)*0.61 = 1.27% Levered Equity Beta = E = 1.63 0.61 = 1.05 Market Value Leverage (1) 0.06 0.14 0.01 Step 3 Equity Cost -Restaurant KE = rF + E x RPM KE = 8.75 0.08 Unlevered Asset Beta (2) 0.23 0.

63% .Restaurant ‡ ‡ ‡ ‡ WACC = (1 .44)(.Leveraged Beta .60)(17.27%) WACC = 2.362 WACC = 12.40)(10.12%) + .266 + 10.T)(D/V)KD + (E/V)KE WACC = (1-.

00% 11.30% 10.47% 0.00% 12.30 41% 263.00% 9.57% 60% 40% 44.72% 1.987 1.10% 10.00% 12.58% 7.95% 1.6 33% Short term 8.00 46% 170.969.58% 7.378 1.54% 8.01% 4.30% Restaurants 2.4 16% Short Term 8.01% 3.58% 42% 58% 44.90 100% Long Term 8.01% 3.43 19.65% 40% 60% 44.43% 0.46 19.05% 12.Marriott .76% 74% 26% 44.25% 12.40% 10.27% Lodging 2.607 1.Summary S.572 1.54% 8.673.95% 1.47% 0.72% 1.63% 30 .No A B C D E F G H I J K L M N O P Q R Description Sales Contribution Profit Contribution Debt Type Government Interest Rate Debt Premium Cost of Debt Stock Index LT Govt Bonds Risk Premium Equity Unlevered Asset Beta Levered Equity Beta Cost of Equity Target Debt Value Target Equity Value Tax Rate WACC Marriott 6.65 22.90 13% 82.20 100% 516.43% 0.05 17.52% 12.9 51% Long term 8.01% 4.67% Contract Svcs 879.80% 10.12% 12.522.

so it is most profitable investment for Marriott and can generate max CF viz-a-viz for contract services As far as project is concerned .25% 0.65% 40% 60% 44.05 17.43 19.12% 0.Conclusion S.65 22.63% Cost of Debt is lower as compared to Cost of Equity Marriott would prefer to get additional investment in form of debt rather than equity Higher the Value of Equity in Capital Structure.378 1.00% 12.05% 0.67% Contract Svcs 10. contract service has maximum risk (equity beta = 1.52% 0.58% 42% 58% 44.00% 12.65) and restaurant has minimum risk (equity beta = 1.00% 11. the higher the WACC and lower the profitability WACC of lodging is least .57% 60% 40% 44.607 1.76% 74% 26% 44.572 1.27% Lodging 10.46 19.No H L M N O P Q R Description Cost of Debt Unlevered Asset Beta Levered Equity Beta Cost of Equity Target Debt Value Target Equity Value Tax Rate WACC Marriott 10.00% 9.987 1.30% Restaurants 10.05) for Marriott 31 .