Marriott Corporation

We are conducting an analysis of Marriott Corporation for calculating the hurdle rates at each of the firm’s three divisions--lodging division, restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate, and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First of all, we will determine the cost of debt, cost of equity and the capital structure for the whole company. Then we will compute for the tax rate, and calculate the WACC for the whole company. After this, we will determine the Risk-free Rates, Risk Premiums and Betas for lodging and restaurant divisions in order to calculate the Cost of Equity for these two divisions. After finding out the cost of debt and the fraction of debt for lodging and restaurant divisions, we will be able to calculate the WACC at each of the two divisions. Using a mathematical method, we will then be able to find out the Beta and determine the cost of debt and the fraction of debt for this division. Finally, we will be able to calculate the WACC for contract service division.

Background

Marriott Corporation was started in 1972, and its founder is Marriott is J. Willard Marriott. The company became one of the leading lodging and food service companies in the U.S. in 60 years. Marriott had three major lines of business: lodging, contract services and restaurants. Lodging operations included 361 hotels, with more than 100,000 rooms in total. Hotels ranged from the full-service, high-quality Marriott hotels and suites to the moderately priced Fairfield Inn. Contract services provided food and services management to health care and educational institutions and corporations. It also provided airline catering and airline service through its Marriott In-Flite Service and Host International