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This case provides you with an opportunity to explore how a company can use the CAPM
model to compute the cost of capital for the whole company and for each of its divisions. To properly
use WACC as a measure for the overall cost of capital, you need to consider the following issues:
o For the purpose of deciding the risk-free rate, Marriott's restaurant and contract service
divisions can be thought of as having project lives of around ten years, its lodging
division and Marriott as a whole have longer economic lives. Which is the more
appropriate risk-free rate to use, the current government interest rate or the historical
average?
As an input to WACC, you also need to determine the debt cost which is expressed as a
premium above the current government rates. You may assume that that spread already reflects
any adjustment for the presence of floating rate debt.
One measure of D/V for Marriott is 58.8% (Exhibit 1), and another is 41% (Exhibit 3). Which is
the correct one to use and why (you should be able to reproduce both numbers)?
As always, you should clearly state your choice of parameters (there are quite a few) in the
course of analysis and provide brief justification. Does your WACC computation result in numbers that
agree with your intuition?