RD, CL, JZ

CASE 3
MARRIOTT
CORPORATION
COST OF CAPITAL
 Overall WACC
risk free 8.72% ~ Table B
debt credit spread 1.30% ~ Table A actual debt-equity
target debt-equity ratio 0.70
~
ratio 1.50 Table A
actual equity beta 1.11
tax rate 34% actual asset beta 0.758849445
cost of debt 6.6132%
target equity beta 1.510110397
1987 market premium
debt 2498.8 ~ Exhibit 1 spread 7.43%

target cost of equity 19.9%

no. shares 118.8
market price 30 ~ Exhibit 1 WACC-overall 14.45%
~
mv of equity 3564 shares*price
 WACC Lodging
Cost of Equity
Cost of Debt
Target Market Leverage 74%
Target Debt/Equity 2.85
Gov't Bond Rate 8.95%
Tax Rate 34% Credit Spread 1.10%

Asset Beta 0.50 Cost of Debt 6.63%

Target Equity Beta 1.45

Risk Free Rate 8.72%

Market Risk Premium 7.43%

Cost of Equity 19.52%

 WACC Lodging
WACC

Actual Equity/V 26%

Actual Debt/V 74%
Cost of Equity 19.52%
Cost of Debt 6.63%

WACC 9.98%
 WACC Restaurants
Cost of Equity Cost of Debt

Target Market Leverage 42% Gov't Bond Rate 8.72%

Target Debt/Equity 0.72 Credit Spread 1.80%

Tax Rate 34% Cost of Debt 6.94%

Asset Beta 0.91

Target Equity Beta 1.34

Risk Free Rate 8.72%

Market Risk Premium 7.43%

Cost of Equity 18.67%

 WACC Restaurants
WACC
• Higher WACC than Lodging
• Capital costs more
• More risky
Actual Equity/V 58% • More heavily financed by equity than
lodging
Actual Debt/V 42%
• Equity costs less than for lodging
Cost of Equity 18.67% • Debt costs more than lodging

Cost of Debt 6.94%

WACC 13.75%
WACC Contract Services