# Marriot

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Submitted By feroz83
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Assignment
Source Document: HBS case- Marriott Corporation: cost of capital

Prepare a case discussion report. The report must at least address the following issues

1. Are the four components of Marriott’s financial strategy consistent with its growth objective?
Marriot has following four financial strategy components * Manage rather than own hotel assets. * Invest in projects that increase shareholders values * Optimize the use of debt in the capital structure * Repurchased undervalued shares.
The company operates in three divisions having following sales and profit figues (1987) 1. Lodging (41% of sales and 46% of profit) 2. Contract services (46% of sales and 33% of profit) 3. Restaurants (13% of sales and 16% of profit).

2. How does Marriott use its estimate of cost of capital? Does it make sense?
Marriott measured the cost of capital for investments of similar risk using the weighted average cost of capital (WACC).Firm WACC is the overall required return on the firm as a whole and it is used by management to determine appropriate investments that could boost the return on its investment and profitability.

3. What is the WACC for Marriott Corp?

a. What risk-free rate and risk premium did you use to calculate the cost of equity?
Marriot uses CAPM ( Capital asset pricing model) evaluate cost of equity re = risk free rate + beta * risk premium Equity beta given is 1.11 but it is a leveraged beta . In order to eliminate the effect of leverage we will estimate asset beta Equity value = 59% Asset beta = 1.11/(1+(41/59)) = .59*1.11 = .655 Equity Beta = Asset Beta * V/E = (.655 *100/40) = 1.64 Equity return = Arithmetic average since 1926 = 12.1% Risk free rate = From exhibit 4 it is 3.54% Cost of equity = 3.54 + 1.64 * ( 12.01- 3.54 ) = 17.43 %

b. How did you measure

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