# Marriot Case

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Submitted By deshpandeswapnil
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| Marriott Corporation | Case Study – Write Up | Hitesh Gupta & Swapnil Deshpande
2-5-2015
|

Q1 what is overall WACC for Marriott Corporation?
Ans :- For calculating WACC we need cost of equity for the firm(ke) ,cost of debt(kd) capital structure of the firm and tax rate (t).
To calculate cost of debt we chose the long term interest rate on U.S. government bond and added debt rate premium (From Table A debt premium = 1.3%) for Marriott Corporation to it. We chose long term US govt bond rate (Rf = 8.95%) majorly because of their lodging business which contributes more than 50% of the profit and has assets of a very long useful lives
The target capital structure is provided in Table A of the case study which is 60% debt and 40% equity. We will use the same while calculating WACC.
From exhibit 1 of case study the Tax rate in the year 1987 for unlevered beta = 44%
= (Income tax / Income before income tax)*100%
To Calculate cost of equity we have followed the below process (See Appendix for calculations): 1) Calculated unlevered beta (βu) using the given debt to equity ratio and given equity beta from Exhibit 3 of case study βu= βl(1+1-t*DE) 2) Levered the βu with the targeted capital structure and tax rate = 35% βl = βu*(1+1-t*DE) 3) To determine the risk premium (Rm – Rf) we have used 1926 -87 Spread between S&P 500 composite return and long term U.S. govt bond return (Exhibit 5 of the case study) to have a reasonable measure of long term riskiness. 4) Using CAPM model we then determine the cost of equity
Hence the Firm level WACC is Ke*D(D+E)+1-t*Kd*D(D+E)
(See Appendix for calculation) WACC = 12.2677%

Q2 what are the appropriate hurdle rates for the 3 divisions: lodging, contracting services, and restaurants?
Ans :- Below are the business wise calculation for Marriott Corporation

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