1. What is the hurdle rate for Marriotts lodging and restaurant divisions? a.

How do you measure the cost of debt for each division? Should the cost of debt differ across divisions? Why? b. What risk-free rate (rf) and risk premium [rm-rf], will you use in calculating the cost of equity for both these divisions? Why? c. How do you use the comparable firms approach to measure e for both these divisions?

a) Cost of debt is measured across the division based on the different government interest rate for different maturity period and premium rate. Cost of Debt: Lodging : U.S. government interest rate for 30 years maturity + premium rate above government rate for lodging business = 8.95% + 1.1% = 10.05 % Assumption : Lodging is long term investment for 30-years.

Contract Services: : U.S. government interest rate for 1 years maturity + premium rate above government rate for contract services = 6.90% + 1.40% = 8.30 % Assumption : Lodging is short term investment for 1-years.

Restaurant : U.S. government interest rate for 10 years maturity + premium rate above government rate for restaurant business = 8.72% + 1.8% = 10.25% Assumption : Lodging is long term investment for 10-years.

Yes Cost of Debt should differ across different division because 1) For different business the premium rate expected by investors are different. Investors perceive the restaurant business more risky and thus expect greater rate of return. Likewise lodging business is considered safest and thus investors charges least premium rate for the lodging. 2) It also depends on the maturity period of the debt. If the investment is for longer period the interest rate is higher than that of short term investment.

b) What risk-free rate (rf) and risk premium [rm-rf], will you use in calculating the cost of equity for both these divisions? Why?