Marriot corporation the cost of capital
Then, the cost of capital for the lodging and restaurant divisions of Marriott is 6. Projects from the restaurant and contract service division will be approved since they are evaluated at a lower rate than the determined cost of these various divisions.
To make the company managers more involved in its financial strategies, Marriott also considered using the hurdle rates for determining the incentive compensations. Approach First of all, we will determine the cost of debt Rdcost of equity Re and the capital structure for the whole company.
As shown in the Exhibit 4, the return rates in each period of time are rather fluctuated.
The cost of debt for contract services is its debt rate premium above government plus 1 year government interest rate and it is 8. We use long term U. Using a higher rate will result in a negative NPV as well as a reduced cash flow.
Marriott case study chegg
Thus, assets should be the best item to weight the unlevered beta. Projects from the restaurant and contract service division will be approved since they are evaluated at a lower rate than the determined cost of these various divisions. The cost of debt for contract services is its debt rate premium above government plus 1 year government interest rate and it is 8. The process to calculate the cost of capital is the same as what we did for other divisions. To estimate the amount of beta as correct as possible, we decided to weight the amount of unlevered beta we had. Finally, we will be able to get the WACC for this division. The investment projects in our company are selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. We use long term U. We use the short term treasury bill returns from for restaurants and contract services as the risk-free rate which is 3.By Marriott using this rate, then any project that arises out of the lodging division will be rejected since its cost of capital of 9. Over time, Marriott will be approving more high risk project from the restaurant and contract service division by evaluating them at a lower rate, while they will be rejecting lower risk projects from the lodging division because they are using a higher rate.
First, we chose the companies in the same line of business of each division lodging and restaurant.