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Financial Management II

~ Marriot Corporation

Q1. Are the four components of Marriotts


financial strategy consistent with its
growth objective?
Should Marriott use external rate?
1) Manage instead of possessing
Marriott attracts extra capital which
offers opportunities for investing
more in future, share hazards with
limited associates.
2)

Investing in ventures that will


increase the value of shareholder
Positive NPV is desired when
investing in new projects.

3) Optimizing capital organization


Increases shareholder value.
4) Repurchasing assets that are
undervalued It can cause to a
reduced growth since organization
utilizes the free funds in buying back
the shares and hence will not invest
much in NPV positive ventures
because that causes reduced growth

Q2. How does Marriott use it

estimate of cost of capital?


Marriott measured the opportunity cost
of capital for investments of similar
risks using the weighted average cost of
capital (WACC).

WACC = (1 - T) * rd(D/V) + re *
(E/V)

Q3. What is the WACC for Marriott

Corporation? What is the cost of its


equity? What is the cost of its Debt?
Please refer Excel.

4)

When should Marriott use


divisional hurdle rate?
For

different divisions they have


different sales, operating profit,
capital expenditure and risk
values.

Using

different rates for different


divisions can be advantageous as
different projects amongst
different divisions might have

5) What is the cost of capital for the lodging


and restaurant divisions of Marriott?

Please

refer Excel.

a.

What risk free rate and risk premium did you use
in calculating the cost of equity for each division? Why?

Rf

Exhibit 4 and Rp - Exhibit 5

lodging

division -long term


(long-term ,
Us Govt. Bond return)

restaurant

division - short term


(S&P 500 Composite returns and shortterm
U.S. Treasury bill returns.)

b. How did you measure the cost of debt for each


division? Should the debt cost differ across divisions?
Why?
rd = government rate of borrowing + premium above govt.
rate
The cost of debt for the lodging division is 10.05%, 8.95%
(risk-free) + 1.10(debt rate premium above government).
The cost of debt for the restaurant division is 8.70%, 6.90%
(risk-free) + 1.80%(debt rate premium above government).
The tax rate used is 44%
Yes, each division is treated as an independent company.
The maturity of U.S interest rates are different for the two
divisions because the lodging division uses long-term 30-year
and the restaurant division uses short-term 1-year.
The spread between the debt rate and the government bond
rate varied by division because of differences in risk.

c.

How did you measure the beta of


each division?
Take the raw equity(levered) beta and D/E of other firms in
the same industry.
To find the unlevered beta for each firm:
Bu= BL / (1+ (D/E) * (1-T)).
Where,D/E = market leverage / (1-market leverage).
Put the D/E value into the unlevered beta formula.
Once you obtain the unlevered beta for each comparable
firm, get the weighted average. (weights are determined by
%of total industry sales)
Next, re-lever beta by plugging the unlevered average beta
into the following formula:
BL = Bu(1+(D/E) * (1-T)).
Where, D/E= debt % / (1- debt %).
Now the unlevered(asset) beta can be re-levered(equity)
beta using:
BL = Bu(1+(D/E) * (1-T))

THANK YOU