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Marriott Corporation

WACC Case Study
by

Mia Kompanova

on 25 April 2013

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Transcript of Marriott Corporation

Project Acceptance Frontier with Corporate Hurdle Rate - Marriott would accept more restaurant projects than lodging projects

- Divisional profit structure would be altered with a bias toward restaurant projects

- Marriott’s growth in lodging, and as a whole, would be reduced Over time… Marriott Projects
Different divisions may have different risks. The division’s WACC should be adjusted to reflect the division’s risk and capital structure.

Lodging
Contracts Services
Restaurants

Employee Compensation
Annual incentive compensation constitutes 30% - 50% of base pay.
Due to the possibility for management to create value for themselves rather than shareholders it is NOT recommended that Marriott use a comparison of WACC and ROA as criteria used to gauge an incentive payout. MARRIOTT CORPORATION Marriott Corporation is determining
the weighted average cost of capital (WACC)
to use as the hurdle rates for future projects and compensation. Marriott Corporation
WACC is one of the most important figures in assessing a company’s financial health.
Internal use (Capital budgeting)
External use (Valuing companies on investment markets)

It can be used as a hurdle rate for investment decisions.
It can be used to provide a discount rate for cash flows with similar risk to that of the overall business. MARRIOTT CORPORATION Cost of debt= Benchmark + Default Premium

Benchmark: 8.72%

Default Premium 1.30% COST OF DEBT

Given:
Tax Rate: 34%
Debt Target: 60%
Equity Target: 40% WEIGHTED AVERAGE COST OF CAPITAL

Given:
Raw Beta: 1.11
Risk Free Rate: 1926-1987 Long-term U.S. Government Bond Return: 4.58%
Average Return of Market: S&P 500 Composite Stock Index Returns: 12.01% COST OF EQUITY COST OF EQUITY COST OF DEBT e= Rf + βL (E(Rm) – Rf) WACC= (1-Tm) * Kd (D/V) + Ke (E/V) Bloomberg Smoothing (Ke) = 28.66% (Kd) = 10.02% WACC for MARRIOTT CORPORATION
WACC = .6(10.02%)(1-34%) + .4(28.66%)

WACC = 15.43% Adjusted Beta= .33 +.67(Raw Beta)

Unlevered Beta= 1.0737

BETA L= BETA ind(1+ (D/E))

2.68 = 1.0737 (1 + (1.5)) LEVERED BETA

Case Study: presented by:

Nicole Breza,
May Daengsanga,
Hartmann Diby,
Keith Hoover,
Bret Kaye,
Martina Kompanova History of the Company 1927 1987 The Weighted Cost
Of Capital LODGING DIVISION Raw Beta 0.89 Target D/E = 0.74 / 0.26

Levered Beta = 1.06 Industry Beta = 0.28 COST OF EQUITY COST OF DEBT COST OF EQUITY COST OF DEBT e= Rf + βL (E(Rm) – Rf) Beta: 1.06

Market Premium: 7.43%

Risk Free Rate: 8.72% (Ke) = 16.60% Cost of debt= Benchmark + Default Premium

Benchmark: 8.72%

Default Premium 1.10% (Kd) = 9.82% WACC for LODGING DIVISION
WACC = .74(9.82%)(1-34%) + .26(16.60%)

WACC = 9.11% RESTAURANT DIVISION Industry unlevered Beta
- average of raw betas
= 0.87 Target D/E = 0.42 / 0.58

Leveled Beta = 1.50 COST OF EQUITY COST OF EQUITY (Ke) = 19.89% COST OF DEBT COST OF DEBT (Kd) = 10.52% e= Rf + βL (E(Rm) – Rf) Cost of debt= Benchmark + Default Premium

Benchmark: 8.72%

Default Premium 1.80% Beta: 1.50

Market Premium: 7.43%

Risk Free Rate: 8.72% WACC for RESTAURANT DIVISION
WACC = .42(10.52%)(1-34%) + .58(19.89%)

WACC = 14.45%
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