Marriott Corporation: The Cost of Capital

Suggested Questions:
1.
How does Marriott use its estimate of its cost of capital? Does
this make sense?
Marriott uses the WACC (=Weighted Average Cost of Capital) for determine
the opportunity cost of capital. It is useful for making decisions about
whether a project should be realized or not. Projects are only profitable if
their return rate is higher than the WACC. So far it does make sense to use
its estimate of the cost of capital.
Marriott requires three inputs for measuring the cost of capital: debt
capacity, debt cost and equity cost. They evaluated the cost of capital for the
whole corporation and in addition for each of the three divisions individually.
This also makes sense because the three inputs for measuring could differ in
each of the divisions and so the cost of capital also varies. Another point is
that most of the projects are related to one division, so its more logical to
use the divisions WACC rather than the WACC of the whole corporation for
deciding whether the project should be realized or not.
Furthermore Marriott used the cost of capital for projects with the proper
hurdle rate to get the NPV by calculation it with the discounted cash flow
method.
2.
What is the weighted average cost of capital for Marriott
Corporation?
As per the attached excel file.
3.
If Marriott used a single corporate hurdle rate for evaluating
investment opportunities in each of its lines of business, what would happen
to the company over time?
It isnt recommendable to use only a single corporate hurdle rate in each of
their divisions. Every division has another risk and this also affects the hurdle
rate. So the hurdle rates in every division are different and vary from the
overall hurdle rate. The rate is usually used to classify reasonable
investments and a single rate could lead to wrong decisions. Risky
investments may appear more profitable as they actually are and less risky
projects may appear less reasonable and profitable. On a long term basis this
could increase the operating risk and so affect the profit in a negative way. It
only could be favorable if all projects would have the same beta factor.
4.

What is the cost of capital for its lodging business?

As per the attached excel file.

5.

What is the cost of capital for its restaurant business?

As per the attached excel file.

6.
What is the cost of capital for its contract services division?
How do you estimate its equity costs without publicly traded
comparable companies?
As per the attached excel file.
7.
What are the differences in the hurdle rates across Marriotts
businesses? Do these differences make sense?
WACC MARRIOTT
WACC LODGING
WACC RESTURANTS
WACC CONTRACT
SERVICES

11.22429
974
7.914867
261
9.753855
465
6.538112
919

We can see that if we have a common WACC for all projects most of the
projects wouldnt have given the NPV positive result because of the high
Marriotts WACC. Therefore we should look for individual WACC.