You may use 34% as the corporate tax rate after the 1986 tax reform act. The cost of capital abstract presents recommendations for hurdle rates of marriott s divisions to select by discounting appropriate cash flows by the appropriate hurdle rate for each division. Marriott corporation cost of capital financial markets. Simon gervais fall 2011 term 2 in this case, you will use the capm model to compute the cost of capital for a whole company and for each of its divisions. The cost of capital estimation process the cost of capital for a company is the cost of raising an additional dollar of capital. Taking a step back, there is an examination of how firms set their capital structure in practice, looking at the internal, external, and cross. Marriott uses its cost of capital estimates to create a hurdle rate to effectively run operations. The cost of capital learning outcomes calculate betas based on comparable companies and lever betas to adjust for capital structure determine appropriate risk less rate and market risk premium choice of time period to estimate expected returns.
Aug 02, 2016 marriott corporation relied on measuring the opportunity cost of capital for investments by utilizing the concept of weighted average cost of capital wacc. The cost of capital calculations for marriott and its three divisions page 5 estimated debt beta and asset beta from other corporations within the same industry page 6. What is the weighted average cost of capital for marriott corporation. Finance 351, corporate finance, marriott corporation, hint sheet. A worldwide operator and franchiser of hotels and related lodging facilities, marriott international marriott owns more than 2600 lodging properties in the us and operates in more than 69 countries. In april 1988, vp of project finance, dan cohrs suggested that the divisional hurdle rates at the company would have a key impact on their future financial and operating strategies. Marriott used this approach to determine the cost of capital for the corporation as a whole and e for each division. Assignment computing cost of capital of firm and each division examining the central role. Mar 18, 2016 first is a discussion of marriotts capital structure and the importance of debt and equity. How to take care of your mental health while working from home. The cost of capital relies on the mode of financing that has been. The opportunity to explore how a company uses the capital asset pricing model capm to compute the cost of capital for each of its divisions. Marriott corporation relied on measuring the opportunity cost of capital for investments by utilizing the concept of weighted average cost of capital wacc. Gives students the opportunity to explore how a company uses the capital asset pricing model capm to compute the cost of capital for each of its divisions.
Marriott corporation corporate finance presentation. What type of investments would you value using marriotts wacc. To properly use wacc as a measure for the overall cost of capital, you need to. Determine weighted average cost of capital wacc for marriott corporation, and the three lines of business.
Marriott corp cost of capital case solution and analysis. To determine the opportunity cost of capital, marriott required three inputs. Marriott was focused on repurchasing stocks that fell under their warranted equity value. In this reflective case, the companys policies and strategies related with hurdle rates and cost of capital are discussed.
If marriott used a single corporate hurdle rate for evaluating investment opportunities. The vice president of project finance at marriott corporation, prepares recommendations annually for the hurdle rates at each of the firms three divisions. These are managing rather then owning hotel assets, investing in projects that increase shareholder value, optimizing the use of debt in the capital structure and. For marriott, the cost of capital is the total of the management fee and operating fee. The cost of capital case study sample fee free download word file and pdf click this. Im lily jacob mba student for harvard university provide you case study a grade paper marriott corporation. The cost of capital case study solution, marriott corp. Jesse galindo, sulabh gupta, maggie jones, wale olukanmi marriott corporation. The cost of capital abridged the purpose of this memo is to estimate the weighted average cost of capital wacc for marriott corporation and its three divisions, as well as explain the logic behind the calculations. What type of investments should be evaluated using. Next is the crucial element of the cost of capital and the key objective of minimizing it. Harvard business case studies solutions assignment help. To find out a suitable hurdle rate, to be used as a discount rate for cash inflows, to evaluate various. Marriotts wacc measures the cost of capital for the whole marriott corporation.
Marriott corporation the cost of capital essay example. Financial decision analysismarriott corporation case study executive summary q5 hurdle rate analysis hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within marriott corporations due to their unique industry risk levels and capital. Marriott corporation the cost of capital case study sample. Since marriott is a huge firm that has a long history, we choose to use the 30year maturity u. Harvard business case marriott corporation cost of capital.
Jan 09, 2018 im lily jacob mba student for harvard university provide you case study a grade paper marriott corporation. Goal question 3 marriott corporation the cost of capital calculate the wacc for the restaurant division of marriott. As of today 20200519, marriott internationals weighted average cost of capital is 9. To properly use wacc as a measure for the overall cost of capital, you need to consider the following issues. Marriott has three lines of business each line of service has its unique cost of debt and beta, so when valuing investments in those three service lines, we would use their own wacc instead of using marriotts wacc. The use of weighted average cost of capital wacc formula and the mechanics of applying it are stressed. Finance 251f351, corporate finance, marriott corporation. Marriott corporation cost of capital case analysis scribd. The cost of capital the four components of marriotts financial strategy are to manage rather than own hotel assets, invest in projects that increase shareholder value, optimize the use of debt in capital structure, and repurchase undervalued shares.
Treasuries are subject to interest rate risk, therefore, the selected maturity should correspond to an investment horizon1. To understand the cost of capital of the marriott corporation, we established wacc and do some calculations to get the results, which contains measuring beta. The three main operating costs are the cost of construction, investment and depreciation. Background as the vice president of project finance at the marriott corporation, we are preparing annual recommendations for the hurdle rates at each of the firms restaurant, lodging and contact services divisions. Marriott corp the cost of capital abridged harvard business. Marriott corp the cost of capital abridged by richard s. Estimation of equity beta o we mentioned in class that we need to use target debt ratio in the estimation of the cost of capital. A hurdle rate of weighted average cost of capital wacc is used. Marriott uses these estimates to operate its four financial strategies. Adjusted results exclude mergerrelated costs and charges, cost reimbursement revenue, reimbursed. Marriott corporation case analysis and wacc calculations. Willard marriotts root beer stand grew into one of the leading lodging and food service companies lines of business.
The cost of capital october 14, 2008 nroop bhavsar prerak shah 2. Marriott corp the cost of capital abridged case solution and. Cost of capital s cost of capital the cost of capital is described by rosenbaum and pearl 2009 as the cost of a firms funds, both equity and debt. Using weighted capital wacc formula and the mechanisms of its. The case states marriott used the cost of longterm debt for its lodging cost of capital calculations since lodging assets has long useful lives. Treasury securities, which are riskfree from default risk. Marriott corp the cost of capital 10 steps case study. Download file pdf harvard business case marriott corporation cost of capital solution free harvard business case marriott corporation cost of capital solution free. Marriot corporation the cost of capital abridged case solution since the publicly traded information for the comparables of contract services division is not available therefore, its asset beta could be calculated from the already calculated asset betas of marriot, restaurant division and lodging division based on the weigh tage of the.
Click to edit master subtitle style october 14, 2008. Marriott corporation the cost of capital cost of capital. Comparing the rate of your marriott hotels to that of the traditional hotels may seem like a useless exercise, but you need to consider the longterm benefits that a simple valuation will give you. Financial decision analysis marriott corporation case study executive summary q5 hurdle rate analysis hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within marriott corporations due to their unique industry risk levels and capital. After the five years of occupancy, these fees are offset by the income from the rent, plus a profit for the loss component, and some other expenses are included. Download as docx, pdf, txt or read online from scribd. Marriott corp cost of capital case solution and analysis, hbr. Marriott corporation the cost of capital, spanish version. Presents recommendations for hurdle rates of marriotts divisions to select by discounting appropriate cash flows by the appropriate hurdle rate for each division. Gives students the opportunity to explore how a company uses the capital asset pricing model capm to compute the cost of capital for each of its div.
About marriott corp the cost of capital abridged case solution and analysis. Willard marriott s root beer stand grew into one of the leading lodging and food service companies lines of business. The weighted average cost of capital wacc is the rate that a company is expected to pay on average to all its. In other words, the cost of capital is the cost of utilizing owners or creditors funds.
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