Marriot Case - Speaker Notes

Speaker notes

• Theoretically say it is appropriate to calculate the cost of capital for each division separately

• We Need to estimate all WACC parameters for each division on a standalone basis:

– what measure of risk free rate is appropriate

– what leverage is sustainable and what cost of debt is realistic for each division – without an effective cross-guarantee of other divisions' assets

– what cost of equity (equity beta and market risk premium) accurately reflects each division's risk

• The following slides detail how these are addressed by Marriott

This table provided by Marriot shows us the debt capacity for each division, let's do a cross check for debt capacity. The overall firm leverage is calculated as weighted average of divisional leverage and we use the result to compare to firm leverage to see how much difference is , and is it acceptable or not. Because the data about each division's asset is not provided, we use the identifiable asset as the proxy. This column with the red circle shows the each division's weights in the company. We also use these weights to calculate the contract service division' beta, because Marriot hasn't provided any comparable company for contract service division.

Column A is division's debt capacity, column B is each division's weight, we multiply A by B, and add them (weighted leverage) together, we get the Marriott's leverage which is 60.8%, and the difference is acceptable.

Now I will pass the presentation to salil, he will talk about the cost of equity, the wacc and other issues.