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MARRIOTT

CORPORATION
B.B.Chakrabarti
IIM Calcutta
August 2005

The Issue
Calculation of WACCs of three
divisions
Lodging
Restaurant
Contract services

Financial Strategy
Manage

rather than own hotel assets


Invest in projects that increase
shareholder value
Optimize the use of debt in the
capital structure
Repurchase undervalued shares

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*(10.34)
= 11.89%

Asset Beta for Lodging


Leverage

Eq. Beta Asset

Beta
Hilton
0.14
0.88
0.76
Holiday 0.79
1.46
0.31
La Quinta
0.69
0.38
0.12
Ramada 0.65
0.95
0.34
Average asset beta = 0.38

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 ) * R + (V / V ) * CS
M
=
(
V
/
V
)
*

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%