Marriott Corporation: The Cost of Capital

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Corporate Finance

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Marriott Business Case

London Business School

Master in Finance 2018

B1 Group

October 2017

Group B1 - Marriott Corporation: The Cost of Capital

The purpose of this note is to estimate the weighted average cost of capital (WACC) for Marriott Corporation and its three main lines of business: hotels (lodging), restaurants and contract services. The key results of the analysis are:

• The calculated WACC for the Marriott Corporation is 10.7%
• The calculated WACC for the individual lines of business are: hotels 9.1%; restaurants 12.0%; and contract services 18.3%

Inputs for these calculations can be found in Table 1. The key assumptions and calculations for these results will be described in the remainder of this note.

Estimation of Beta

Since there is no comparable public company to Marriott, due to its diverse range of businesses, we approach it as a portfolio of three separate and standalone business lines: lodgings (hotels), restaurants and contract services. The current beta of Marriott Corporation is 0.97, in the analysis this was unlevered based on current debt-to-equity ratio (0.69) and then re-levered based on the target debt-to-equity ratio (1.50) to get to the levered beta 1.28. The tax rate of 44.1% is used – this is calculated as Income taxes/Income before taxes in 1987 for Marriott Corporation. This is the tax rate assumed going forward for the business.

The unlevered betas of comparable businesses for hotels and restaurants were calculated with results in Table 2. In this case the tax rate for each business is assumed to be zero to ensure consistency in calculations. It is recognised that not all these businesses operate in an identical fashion to Marriott (e.g. Hilton Hotels and Holiday Corporation operate casinos; a number of the restaurants companies have franchised restaurants). However overall, they are comparable business and offer consumers a viable alternative to using Marriott’s services.

For hotels (lodging) and restaurants, an average of the comparable business unlevered betas was used to calculate the unlevered business line betas. We chose to use a simple arithmetic average and not to weight by market capitalisation, as this can lead to the business line average being dominated by a small number of large companies.

The percentage weighting of each business line is established and shown in Table 3. Total Identifiable Assets of each business line was used as a proxy for the total equity value of each division. This was used rather than weighting by the profit generated by each business line as it represents a more stable measure over time and is not dependent on external uncontrollable factors (e.g. demand for services).