Marriott Corporation: The Cost Of Capital

Marriott Corporation:
The Cost of Capital
October 14, 2008
Nroop Bhavsar
Prerak shah

Company Background
• Began with J. Willard Marriott’s root beer stand
• Grew into one of the leadinglodging and food service
companies
• Lines of business:
Lodging
Contract services
Restaurants

Company Goals

• Intend to remain premier growth company:
Aggressively developing appropriateopportunities
within
within existing line of business
To become preferred employer, preferred provider and
the most profitable company in existing lines of
business

Financial Strategy
•Selection of investment project by discounting expected cash
flow at hurdle rate for each divisions.
– Hurdle rate is the minimum rate of return that must be met for a
company to undertake a particularproject.
For example,
Typical Hotel Profit and Hurdle rates
50%
40%
30%
20%

Hurdle rate

10%

Profit rate

0%
1
-10%
-20%

2

3

4

5

6

Elements of Financial StrategyI.

Manage rather than own hotel assets

II. Invest in projects that increase shareholder value
III. Optimize the use of debt in the capital structure
IV. Repurchase undervalued share

Costof Capital and the Comapny
• Company measures opportunity cost of capital for investment
with similar risk using the Weighted Average Cost of Capital.
• WACC= (1-t)*rD*D/V + rE*E/V
Where, t=corporate tax rate
rD= cost of debt
D/V= % of debt financing
rE= cost of equity
E/V= % of equity financing

Elements of WACC

• Unlevered beta
• Levered beta
• Cost of equity
• Cost of debtElements of WACC

Unlevered Beta

Levered Beta

Beta
Beta of a company without any
debt (Published beta)

Beta
Beta of a leveraged required
return

Unlevering a beta removes thefinancial effects from leverage

Hamada's formula:
BL= Bu [1+ (1-t) D/E]

Elements of WACC
• rE: cost of equity (CAPM)
• rE= Rf + Beta*(Risk premium)
where, Rf= risk free rate (generally, 3-month...