Marriott - The Cost of Capital
1/25/2012

Since Marriott and its three divisions all have debt and equity in their capital structure. The cost of capital is the same as Weighed average of cost of capital WACC.

WACC = Rd x Wd x (1-T) + Re x We

Cost of debt (pretax) = Rd

| |Debt Rate Premium Over |Government Rate* |Pretax Cost of debt |
| |Government | | |
|Mariott |1.30% |8.95% |10.25% |
|Lodging |1.10% |8.95% |10.05% |
|Contract Services |1.40% |6.90% |8.30% |
|Restaurants |1.80% |6.90% |8.70% |

For each division, cost of debt is calculated by US government interest rate plus premium.
For Marriott and Lodging, since they have longer useful lives, we use 30 year US government interest rate of 8.95%; for Contract service and restaurants, which have shorter useful life, we use 1 year US government interest rate of 6.9%.

Tax rate

From Income Statement, tax rates from 1978 to 1987 range from 37% to 47%, average of 42%. In 1987, tax rate reached 44% resulting from its strong sales growth of 22%, however, considering 1987 October’s stock market crash, economy went south, it is reasonable to assume that sale won’t keep up with previous year, therefore, net income will decrease, and consequently, tax rate will decrease, so we assume it to be 42%. For simplicity, we use this rate for Marriott and all its three