Marriot Case

Financial Management II Assignment -2 Marriott Corporation – The Cost of Capital Faculty: Prof. Abhilash S Nair Submitted By: Arshdeep Singh Amit Kumar Ashish Dennis Dean Vimal Mohan Jain

Calculating WACC for Marriot Marriot has three divisions : Lodging Restaurant Contract services

Financial Strategy of Marriott Manage rather than own hotel assets Invest in projects that increase shareholder

value Optimize the use of debt in the capital structure Repurchase undervalued sharesunlevered

Unlevered Asset Beta Asset beta = (E/V) * Equity beta

E = Market value of equity V = Market value of company = Market value of equity + Market value of Debt

WACC for Marriott Corporation Levered equity beta = 0.97 Market leverage = 0.41 Unlevered asset beta = (1-0.41)*0.97

= 0.57 Target debt/value = 0.60 Levered equity beta = 0.57/(1-0.60) = 1.43

WACC for Marriott Corporation Keq = Rf + beta *Risk premium

= 8.95 + 1.43 * 7.43 = 19.57% Kdebt = 8.95 + 1.30 = 10.25% WACC = 0.4*19.57+0.6*10.25*(1-0.34) = 11.89%

Asset Beta for Lodging Leverage Eq. Beta 0.14

Hilton 0.76 Holiday 0.79 La Quinta 0.69 Ramada 0.65

1.46 0.38 0.95

Average asset beta = 0.38

Asset Beta 0.88 0.31 0.12 0.34

WACC for Lodging Division Unlevered asset beta = 0.38 Target debt/value = 0.74 Levered equity beta = 0.38/(1-0.74) = 1.46 Keq = Rf + beta *Risk premium

= 8.95 + 1.46 * 7.43 = 19.80% Kdebt = 8.95 + 1.10 = 10.05% WACC = 0.26*19.80+0.74*10.05*(1-0.34) = 10.06%

Asset Beta for Restaurant Division CFC CFI FR LC Mc WI

Leverage 0.04 0.10 0.06 0.01 0.23 0.21

Eq. Beta 0.75 0.60 0.13 0.64 1.00 1.08

Average asset beta = 0.61

Asset Beta 0.72 0.54 0.12 0.63 0.77 0.85

WACC for Restaurant Division Unlevered asset beta = 0.61 Target debt/value = 0.42 Levered equity beta = 0.61/(1-0.42) = 1.05 Keq = Rf + beta *Risk premium

= 8.72 + 1.05 * 7.43 = 16.52% Kdebt = 8.72 + 1.80 = 10.52% WACC = 0.58*16.52+0.42*10.52*(1-0.34) = 12.50%

Asset Beta for Contract Services Division There is no publicly traded comparable

companies. We can consider the company as a portfolio of three divisions. The asset beta of the whole company is just a weighted average of the asset betas of the divisions. Weights should be the fraction of total equity value in each division. The fraction of total identifiable assets can be taken as a proxy.

Asset Beta for Contract Services Division

L + (V / V ) * βR + (V / V ) * βCS βM = ( V / V ) * β L M R M CS M A A A A

Asset Beta for Contract Services Division So, 0.57=909.7/1735.2*0.38+452.2/1735.2* 0.61+373.3/1735.2*Asset beta (CS) Asset beta (CS) = 0.98

WACC for Contract Services Division Unlevered asset beta = 0.98 Target debt/value = 0.40 Levered equity beta = 0.98/(1-0.40) = 1.63 Keq = Rf + beta *Risk premium

= 8.95 + 1.63 * 7.43 = 21.06% Kdebt = 8.95 + 1.40 = 10.35% WACC = 0.60*21.06+0.40*10.35*(1-0.34) = 15.38%

WACCs of the Divisions Lodging – 10.06% Restaurant – 12.50% Contract services – 15.38% Marriott Corp. -

11.89%