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Marriott Corporation

CASE STUDY
Three main lines of business.

• Lodging
• Contract services
• Restaurants
Financial Strategy

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





Calculating the WACC
Calculation of WACC Mariott Lodging Contract Restaurant

WACC= (1-t)*rD(D/V)+rE*(E/V)

t= 0,441 0,441 0,441 0,441

1-t= 0,559 0,559 0,559 0,559

rD= 0,1025 0,1005 0,0830 0,0870

rE= 0,2117 0,1952 0,3050 0,2084

D/V= 0,60 0,74 0,40 0,42

E/V= 0,40 0,26 0,60 0,58

Percentage of total revenues 100% 0,41 0,46 0,13

WACC= 11,91% 9,23% 20,16% 14,13%


 The capital asset pricing model (CAPM) is a
model that describes the relationship between
systematic risk and expected return for assets,
particularly stocks.

 It is an integral part of the weight average cost of


capital (WACC) as CAPM calculates the cost of
equity.
Calculation of Re Mariott Lodging Contract Restaurant

Re= Rf + β X ( Rf- Rm )

Rf 0,0895 0,0895 0,0690 0,0690


β 1,6450 1,4230 2,7860 1,6460
Rf-Rm 0,0743 0,0743 0,0847 0,0847
Re 0,2117 0,1952 0,3050 0,2084

Note That: Rf-Rm is called as Risk Premium.As Lodging is long term then we use 7,43%.
8,47% for both restaurant and contracts because they are short term

**Note That: For Long-Term we used S&P 500 and Long-Term U.S Bond Returns In Exhibit 5.
**Note That: For Short-Term we used S&P 500 and Short-Term U.S Treasury Bill Returns In Exhibit 5.
 Unlevered beta (Asset Beta) is the beta of a
company without the impact of debt. It is
also known as the volatility of returns for a
company, without taking into account its
financial leverage.

 Conversely, levered beta (or “equity beta”)


is a measurement that compares the
volatility of returns a company’s stock
against those of the broader market. In other
words, it’s a measure of risk.
ASSET
BETA

LEVERED
BETA
MARRIOTT LODGING CONTRACTS RESTAURANTS

UNLEVERED BETA 0,8950 0,5490 2,0300 1,1015

RE-LEVERED BETA 1,6450 1,4230 2,7860 1,6460


 Credit Spread: Default Spread based upon rating

 The risk-free rate is customarily the yield on government bonds like


U.S. Treasuries.
Atvejo problemos
Calculation of Rd Mariott Lodging Contract Restaurant

Rd= G.Bond Rate + Spread

Goverment Bond Rate 0,0895 0,0895 0,0690 0,0690

Spread 0,0130 0,0110 0,0140 0,0180

0,1025 0,1005 0,0830 0,0870


Rd
 Marriott has to choose a risk value for each of the
business and then go for combining the Hurdle rates for
different business to form a portfolio and decide upon
which business to invest in.

 Based on the WACCs stated for Marriott and its various


departments it’s obvious that the values are different

 If Marriott has used only one hurdle rate then it would be


used the 11.91% rate which is for the entire company.
 As the risk in a business changes, the β value would
change thus changing the hurdle rate. The future
rates that the firm has used to predict the WACC are
themselves prone to change with time.

 That is why WACC needs to be updated regularly to


make accurate decisions.
 We represent the cost of capital with risk, so therefore
the risk in the lodging department is lower when
compared with other departments that have a higher
WACC.

 While Marriott used this rate, other projects would be


rejected exact Lodging because of its cost of capital
of 9.23% which is lower than Marriott’s WACC as
entire.

 A higher rate effects in a negative Net Present Value


as well as a reduced cash flow.
 Fundamentals of Corporate Finance, Sixth Edition. Westerfield,
Jordan Ross
 https://corporatefinanceinstitute.com
 https://www.wikipedia.org
 http://www.investopedia.com/
 Corporate Finance, Pierre Vernimmen, Second Edition
 http://pages.stern.nyu.edu/~igiddy/articles/wacc_tutorial.pdf