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Marriott Corporation: The Cost of Capital

Autor:   •  November 19, 2018  •  Case Study  •  661 Words (3 Pages)  •  623 Views

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Note, we are using the hurdle rate (minimum rate of return required to accept the project) as the discount rate in performing a discounted cash flow, to make decisions for the hotel management regarding project investments and repurchase of shares. The main benefits of this include:

  • Calculating NPV to determine operating strategy. If the hurdle rate is too high, some profitable projects may be eliminated, potentially slowing the total growth rate.
  • Determining incentive compensation, increasing awareness for managers in deciding Marriott’s financial strategies.

Conversely, the traditional way ignores the differences of the major lines of business. Namely, they are lodging, contract services, and restaurants. Though not wrong, we believe it is not as precise as we would like.

  • Firstly, concerning the working period, the lodging service’s working period is longer than that of either lodging or the restaurant business.
  • Secondly, when it comes to risk, the WACC can only measure investment of similar risk class. However, the three different businesses are not comparable in this manner.

Thus, in order to make our valuation more precise, we need to calculate the WACC for each line of business separately, while taking into consideration each one of their respective features.

  1. The Lodging division

Using the market value weighted unlevered beta for , MARRIOTT, as market leader in hotels, maintains a large market share. Its value weighted beta is quite reasonable. [pic 1]

Lodging Industry

Arithmetica Average Return

Equityb Beta

Marketc Leverage

1987 Revenues ($ billions)

D/E

effective tax rate

Unlevered Beta

MARRIOTT--Lodging

 

 

 

2.67

 

 

 

HILTON

13.3

0.76

14%

0.77

0.16

0.44

0.70

HOLIDAY

28.8

1.35

79%

1.66

3.76

0.44

0.43

LA QUINTA

-6.4

0.89

69%

0.17

2.23

0.44

0.40

RAMADA

11.7

1.36

65%

0.75

1.86

0.44

0.67

WEIGHTED AVERAGE beta_u

 

 

 

 

 

 

0.545

1.41[pic 2]

...

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