UCLA Law School Prof. Mark Garmaise
Spring 2016

Law 447 – Memo #1

Marriott Corporation Memo (required): The Marriott case will be discussed in class on Mar. 2. Prepare, in groups of no more than three students, a 2-page memo answering the questions below. The memo is to be submitted to the records office by 12 noon on Mar. 2. Groups should submit only one memo. Please retain a copy of your memo for purposes of class discussion. The following are some further guidelines:

1. The case provides a formula for the weighted average cost of capital (WACC) that differs slightly from the formula given in class. For the purpose of your analysis, use the version of the formula given in class:

We will discuss the version of the WACC given in the case later in the course.

2. In answering the questions below, pay careful attention to the distinction between Marriott’s current capital structure and its target capital structure.

Please answer the following questions in your write-up:

1. What is the WACC for the Marriott Corporation? Use the data in the case to estimate the risk free rate and market risk premium.

2. What would be the result if Marriott used the same single corporate hurdle rate to evaluate investment opportunities in all of its lines of business?

3. What discount rate should be applied to Marriott’s lodging projects? What discount rate should be applied to Marriott’s restaurant projects?

4. What is the cost of capital for Marriott’s contract services division? Note that there is no publicly traded comparable company. (Hint: consider the analysis you undertook in the first problem of this memo.)

5. Suppose Marriott spun off its lodging business as a completely separate firm (with the target capital structure described in Table A). What would be the expected return on the equity of the separate lodging business? Suppose