Marriott Corporation

Marriott Corporation

The final topic in this course incorporates a widely used financial decision-making model, the Capital Asset Pricing Model (CAPM). At this stage of the course, the student must assume a more independent role in the Marriott Corporation case and constructing a quantitative analysis of assessing managerial performance in the Corporation’s operating divisions.

Upon completion, the student should be able to calculate levered and un-levered betas in risk-adjustment analysis. Additionally, the student should be able to calculate the corporate and subsidiary costs of capital in the "Marriott Corporation: The Cost of Capital" case study.

Additionally, the following questions should be answered.

If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?

How does Marriott use its estimate of its cost of capital? Does this make sense?

Are the four components of Marriott’s financial strategy consistent with its growth objective?

Example: Levered and Un-Levered Betas

Equity betas are measures of systematic risk associated with a stock. Systematic risk is that risk which cannot be diversified. Unsystematic risk is diversifiable risk and is risk unique to the particular stock. Total risk is the sum of systematic risk and unsystematic risk and is measured by the standard deviation of a stock’s returns.

Beta is the slope of the regression between a stock and a market portfolio proxy, such as the S&P 500 Index. Equity risk (total risk) is influenced by the firm’s leverage. Leverage, if overused, can translate to increase risk of default leaving equity holders subordinate to debt holders in any recovery of loss. This increased credit risk premium translates to a higher required