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1、Case1-MarriottCorporation:TheCostofCapitalFIN500Team4:JesseGalindo,SulabhGupta,MaggieJones,WaleOlukanmiMarriottCorporation:TheCostofCapitalExecutiveSummaryJ.WillardMarriottstartedMarriottCorporationin1927witharootbeerstand,expandingitintoaleadinglodgingandfoodservicecompanywithsalesofover$
2、6billionby1987.Atthetime,Marriotthadthreemainlinesofbusiness,lodging,contractservicesandrestaurants,withlodginggeneratingabout51%ofcompany’sprofits.ThefourkeyelementsofMarriott’sfinancialstrategyweremanaginghotelassetsratherthanowning,investinginprojectswiththegoalofincreasingshareholderva
3、lue,optimizingtheuseofdebt,andrepurchasingtheirundervaluedshares.MarriottCorporationreliedonmeasuringtheopportunitycostofcapitalforinvestmentsbyutilizingtheconceptofWeightedAverageCostofCapital(WACC).InApril1988,VPofprojectfinance,DanCohrssuggestedthatthedivisionalhurdleratesatthecompanywo
4、uldhaveakeyimpactontheirfuturefinancialandoperatingstrategies.Marriottintendedtocontinueitsgrowthatafastpacebyrelyingonthebestopportunitiesarisingfromtheirlodging,contractservicesandrestaurantslinesofbusinesses.Tomakethecompanymanagersmoreinvolvedinitsfinancialstrategies,Marriottalsoconsid
5、eredusingthehurdleratesfordeterminingtheincentivecompensations.Whatistheweightedaveragecostofcapital(WACC)forMarriottCorporation?WACC=(1-τ)rD(D/V)+rE(E/V)D=marketvalueofdebtE=marketvalueofequityV=valueofthefirm=D+ErD=pretaxcostofdebtrE=aftertaxcostofdebtτ=taxrate=175.9/398.9=44%CostofEquit
6、yTargetdebtratiois60%;actualis41%[Exhibit1]Page6Case1-MarriottCorporation:TheCostofCapitalFIN500Team4:JesseGalindo,SulabhGupta,MaggieJones,WaleOlukanmiβs=1.11βu=βs/(1+(1–τ)D/E)=1.11/(1+(1–.44)(.41))=0.80Usingthetargetdebtratioof60%:βTs=βu(1+(1–τ)D/E)=.8(1+(1–.44)(.6/.4))βTs=1.47UsingCAPM:r
7、f=8.95%long-termrateonU.S.governmentbonds(rm–rf)=7.43%average1926-1987rE=rf+βTs(rm–rf)=8.95%+(1.47)(7.43%)=19.87%CostofDebtrD=governmentbondrate+creditspread=8.95%+1.30%=10.25%WACC=(1-τ)rD(D/V)+rE(1-D/V)=(1–.44)(.1025)(.6)+(.1987)(.4)=11.39%IfMarriottusedasing
