Marriott Corporation: The Cost of

Capital
Marriott Corporation a leading lodging and food service company has three lines of
business:
1) Lodging
2) Contract Services
3) Restaurants
The company needs to measure weighted average cost of capital for the three
services it provides.
We have found that the corporate tax rate for the corporation for the year 1987 is:
Income Tax / EBIT = 175.9 / 398.9 = 44.09% approx. (44%)

Marriot Corporation:
For Marriot Corporation we used the risk free rate of a 30 year government bond (8.95%) to
estimate the total risk free rate. To calculate the cost of equity we use the spread
between S&P 500 as well the government, market risk premium is 7.43%.
Cost of equity with beta = 1.43 is 19.58%.
Next, we calculate the cost of debt which is: Risk free rate + Debt rate premium =
10.25%
Targeted debt in capital is 60%
WACC of Marriot Corp. = 11.3%
Marriot Corp. would value investments that have similar characteristics as the
divisions that were used to create the WACC.

Now, we calculate the cost of capital for all the three divisions:

Lodging:
Four lodging services: Hilton Hotels, Holiday Corp., La Quinta Inns, and Ramada Inns
In, lodging services we take a similar approach, the risk free rate of a 30 year government
bond (8.95%) to estimate the total risk free rate. To calculate the cost of equity we use the
spread between S&P 500 as well the government, market risk premium is 7.43%.
After taking a weighted average beta approach for the four lodging services the
relevered beta is 1.51.
Cost of equity: 20.87%

Calculate the cost of debt which is: Risk free rate + Debt rate premium = 8.95 +
1.10 = 10.05
Targeted debt in capital for lodging is 74%
WACC for lodging services is: 9.5%

Restaurants:
Four restaurant services: Churchs fried chicken, Collins food international, Frischs
Restaurants,
McDonalds, Wendys International
In, restaurant services we have a smaller time frame to look forward to, hence, we
choose the risk free rate of a 10 year government bond (8.72%) to estimate the total risk free
rate. To calculate the cost of equity we use the spread between S&P 500 as well the
government, market risk premium is 7.43%.
After taking a weighted average beta approach for the four restaurant services the
relevered beta is 1.21.
Cost of equity: 17.72%
Calculate the cost of debt which is: Risk free rate + Debt rate premium = 8.72 +
1.80 = 10.52%
Targeted debt in capital for restaurants is 42%
WACC for restaurant services is: 12.8%

Contract Services:
In, contract services we have a smaller time frame to look forward to, hence, we
choose the risk free rate of a 10 year government bond (8.72%) to estimate the total risk free
rate. To calculate the cost of equity we use the spread between S&P 500 as well the
government, market risk premium is 7.43%.
Cost of equity is for beta 1.46% is: 19.57%
Cost of debt = Risk free rate + Debt rate premium = 8.72 + 1.40 = 10.12%
Targeted debt in capital for contract services is 40%
WACC for contract services is: 14.0%

Table of data:
Division

Unlevered
Beta

Relevered
Beta

Cost of
equity

Cost of
debt

Target
debt in

WACC

Marriott

0.57

1.43

19.58%

10.25%

capex
60%

Lodging

0.41

1.58

20.67%

10.05%

74%

9.5

Restaurant

0.70

1.21

17.72%

10.52%

42%

12.8%

Contract

0.88

1.46

19.57%

10.12%

40%

14%

WACC for each division:

Weighted average Cost of Capital
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

11.3%