Marriot Case Study

The main goal of Marriot Corporation was to remain the premier growth company and become the most profitable company in its existing lines of business. They planned to do so by investing in projects that only increased shareholder value and did so by using the hurdle rate. This meant that investment projects were selected by discounting the cash flows and assigning the appropriate market, interest rates project risks, and risk premium estimates.

In order to take a look at the cost of capital, certain key facts and assumptions had to be used. Marriott uses the WACC method to measure the opportunity cost for investments. In order to determine the risk free rate of return we had to choose from table B and select ones that would best fit our needs. The RF for long term was selected from the 10 Year US government bond rate (8.72%), as opposed to the short term 1 Year bond because it encompasses a longer period and provide the best rate. Furthermore, the return on market premium was determined at 9.03% and the risk free rate was what was given according to Table A and table B. The debt to equity ratio was calculated using the formula: D/E = Debt(liabilities)/equity. This provided us with the D/E ratios for Marriot as a whole and each of its divisions as follows: Marriot-2.34, Lodging-5.09, Contract Services-0.98, and Restaurants-1.06. The income tax rate was calculated from the income statement and assumed to be 44% for all the divisions of Marriott. All the WACC calculations were based on target values that we wanted to achieve for debt and equity. The unlevered betas were used in the initial calculations, but eventually leveraged betas were calculated and used in the WACC calculations. The CAPM formula was calculated and used as the cost of equity.

The WACC or hurdle rate that Marriot should be using is 6.41%. However, this rate is extremely sensitive to variations on the market as premium rates change. Marriott has to calculate individual WACC