1. Version 1.0
Case 2 - Marriott Corporation
Group members (section3):
Muhamad Amir Ikram bin Jefry 1616277
Nur Amaleena binti Mohammed 1520380
Nurhani binti Abd Muis 1528074
Liu Yawen 1522276

2. Contractservices (airlines
foodandservices
management)
Generates 46% of sales and
33% of profit
Marriott
Corporation
Cost of capital varied across
the three divisions due
to differentweightage, cost
of debt and costof equity.
Marriott group’s capital:
Debt: 60%
Equity: 40%
Beta: 1.11
Lodging(Marriott
hotelsand Suites)
Generates 41% of sales
and 51% of profit
Restaurants (Marriott
restaurants)
Generates 13% of sales
and 16% of profit
Whether cost of capital should be calculated at group level or at each divisional level.
Key issues of Marriott Corporation
Capital
Debt:74% (uselong-term
debt)
Equity: 26%
Capital
Debt:40% (useshort-term
debt)
Equity: 60%
Capital
Debt:42% (useshort-term
debt)
Equity: 58%

3. (1) Are the four components of Marriott’s financial strategy consistent with
its growth objectives?
Marriott is determined to develop and to enhance its position in each division with its
growth objectives of:
In order to achieve its goal, the managers of Marriott have developed a financial strategy
with 4 main decisions:
(a) Manage rather than own hotel assets.
(b) Invest in projects that increase shareholders value
(c) Optimize the use of debt in capital structure
(d) Repurchase undervalued shares
To become themost
profitablecompany.
To be the preferred
employer.
To be the preferred provider.

4. (a) Manage rather than own hotel assets.
Consistent with growth strategy. In this way, Marriott attracts additional capital,
which gives an opportunity to invest more in the future and share some risks with limited
partners. Partnership may be also a good way of saving on taxes. It leads to decrease in
cost and the save on the costs can be invested in more hotel and generate profits.
Therefore it increases potential profitability.
(a) Invest in projects that increase shareholders value.
Consistent with growth. Positive NPV projects increase shareholders value. The
discounted cash flow technique used to evaluate potential investments allow the company
to invest only in profitable projects. This can maximize the use of its cash flow to gain
profit.

5. (c) Optimize the use of debt in capital structure.
Consistent with growth. Optimal capital structure generally should lead to a
higher shareholder value. It also gives a good way to control default risk by aiming at
certain coverage ratio. The company has A rating. It means Marriott is able to borrow
an important amount of money to invest in order to generate high profits. Therefore it
is important to optimize the debt level.
(d) Repurchase undervalued shares.
Not consistent with growth. In theory, share repurchase do not improve the
fundamental strength of the company. It merely reduces the total number of shares
outstanding. Although share repurchase will increase shareholders wealth, the fund
used for share repurchase will not improve its profitability in the long term. It’s better
for the firm to use the funds available for future projects with positive NPV.

6. (2)(a) What is the WACC for Marriott as a whole?
To compute WACC as a whole:
COST OF DEBT
Kd
= Risk free rate + Debt rate premium
= 8.95% + 1.30%
= 10.25%
*Risk free rate = government bond
rate (Table B)
*Debt rate premium = credit spread
(Table A)
DEBT PORTION
60%
(Table A - debt in capital)
COST OF EQUITY
Ke
=Rf + Beta(Rm-Rf)
=8.95%+1.63(7.43%)
= 21.06%
*Rm-Rf= spread between S&P 500
and long term government bond
return (1926- 1987) (Exhibit 5)
EQUITY PORTION
40%
(100% -60% debt)
To find corporate
tax:
Tax rate (1987)
=Income tax/EBT
=$175.9M/$398.9M
=0.44

7. 2 (a) continued....
To compute WACC as a whole:
WACC
WACC
= (After-tax cost of debt x Debt portion) + After-tax cost of equity x Equity portion
= (1-0.44) (10.25) (0.6) + (21.06) (0.4)
=11.87%
The company’s WACC as a whole is 11.87%
● This means that Marriott Corporation can accept projects with return equal or higher
than 11.87%

8. (2)(b) If Marriott used a single corporate hurdle rate for evaluating
investment opportunities in each lines of business, what would happen to the
company over time?
Hurdlerate reflects
required return of
firm. It is use as a
basis for
investment
decisions
If a single corporate
hurdle rate is
used,company will tend to
accept higher risk
projects, and rejects
lower risk projects
regardless of divisions.
Cost of capital =
risk,
which means
higher risk is
shown by higher
WACC
Different decisions
often have different
hurdle rates
because of the
different risks
and rewards.
Thus, it results in a
riskier image for
Marriot Corporation
in the long run.

9. (3) What is the cost of capital for the lodging, restaurants and contract
services division?
To calculate Cost of Capital, we will use
WACC= WsKs + WdKd(1 - tax)
Whereby:
Ws = Weightage of equity
Ks = Cost of Equity = CAPM = Rf + B (MRP)
Wd = Weightage of debt
Kd = Cost of Debt = Debt rate premium above government + Government interest rate
Tax = Calculated from income statement = 44.1% (assume same for all)
(a) Weightage:
Lodging
Debt:74%
Equity: 26%
Contractservices
Debt:40%
Equity: 60%
Restaurant
Debt:42%
Equity: 58%

10. (b) To find Ks (CAPM), we need to find Risk-free rate (Rf), Levered beta (B) and Market Risk
Premium (MRP).
(i) Rf for each business segment:
Lodging Contract Services Restaurant
U.S Government
interest rate (Table B)
8.72%
(10-year rate)
6.90%
(1-year rate)
6.90%
(1-year rate)

11. (ii) Levered Beta (B) for each business segments:
Equity
beta
(Exhibit 3)
Market
Leverage
(Exhibit 3)
Debt to
Equity
ratio
Beta leverage
(1 + Debt Equity
ratio)
Unlevered asset Beta
(Equity beta/Beta
leverage)
Marriott 1.11 41% 0.6949 1.6949 0.655
Hotels:
Hilton Hotels
Corporation
0.76 14% 0.1628 1.1628 0.650
Holiday Corporation 1.35 79% 3.7619 4.7619 0.284
La Quinta motor inns 0.89 69% 2.2258 3.2258 0.276
Ramana inns, inc 1.36 65% 1.8571 2.8571 0.476
Average
Unlevered Beta
0.422

12. Restaurants:
Equity
beta
(Exhibit 3)
Market
Leverage
(Exhibit 3)
Debt to
Equity
ratio
Beta leverage
(1 + Debt
Equity ratio)
Unlevered asset Beta
(Equity beta/Beta
leverage)
Church’s Fried
Chicken
1.45 4% 0.0417 1.0417 1.392
Collins Foods
International
1.45 10% 0.1111 1.1111 1.305
Frisch’s Restaurants 0.57 6% 0.0638 1.0638 0.536
Luby’s Cafeterias 0.76 1% 0.0101 1.0101 0.752
Mcdonald’s 0.94 23% 0.2987 1.2987 0.724
Wendy’s International 1.32 21% 0.2658 1.2658 1.043
Average
Unlevered Beta
0.958

13. Since there is no publicly-traded comparable company for Contract Services, we can consider the
company as a portfolio of three divisions, thus:
Asset Beta of Marriott = (Asset of Lodgings/Asset of Marriott) x Asset Beta Hotels
+ (Assets of Contract services/Assets of Marriott) x Asset Beta Contract
+ (Assets of Restaurants/Assets of Marriott) x Asset Beta Restaurants
1.638 = (2777.4/4482.7) x 1.625 + (1237.7/4482.7) x Beta contract + (467.6/4482.7) x 1.65
Asset Beta contract = 1.663
Hotels:
Average unlevered asset
beta = 0.422
Debt = 74% = 0.74
Levered asset beta = (1/0.26)
x 0.422 = 1.625
Restaurants:
Average unlevered asset
beta = 0.958
Debt = 42% = 0.42
Levered asset beta = (1/0.58)
x 0.958 = 1.65
(iii) Market Risk Premium (MRP) = Spread between S&P Return and Long-term Government Bond
= 7.43%
Marriott:
Unlevered asset beta =
0.655
Debt = 60% = 0.6
Levered asset beta =
(1/0.4) x 0.655 = 1.638

14. (c) To find Kd (Cost of debt), we need to add the Debt rate Premium to the Risk-free rate.
Lodging Contract Services Restaurant
(1) Debt rate premium
above government
(Table A)
1.10% 1.40% 1.80%
(2) U.S Government
interest rate (Table B)
8.72%
(10-year rate)
6.90%
(1-year rate)
6.90%
(1-year rate)
Cost of Debt (1)+(2) 9.82% 8.30% 8.70%

15. WACC calculations
Lodging Contract Services Restaurant
Kd 9.82% 8.30% 8.70%
Wd 0.74 0.40 0.42
1- Tax 0.559 0.559 0.559
Ks
Rf 8.72% 6.90% 6.90%
B 1.625 1.663 1.65
MRP 7.43% 7.43% 7.43%
Ws 0.26 0.60 0.58
WACC 9.47% 13.41% 13.16%