Marriott Corporation” the Cost of Capital Essay

What is the weighted average cost of big(p) for the Marriott Corporation and cost of working capital for for each one of its ingredients? What safe lay out and happen bonus did you go for to picture the cost of fairness? How did you evaluate the cost of debt? How did you measure the of import for each department?SolutionWhat safe come in and risk amplitude did you use to calculate the cost of equity? risk-free rate legateThe risk-free rate is determined using the yields of U.S. Treasury securities, which atomic number 18 risk-free from default risk. U.S. Treasuries atomic number 18 win to interest rate risk, therefore, the selected maturity should concord to an investing horizon1. Investment horizon tally to the cost-of-capital calculation methodology used by Marriott Corporation, lodging division was treated as long-term, while restaurant and contract serve divisions were treated as short-term because those assets had shorter reusable lives. Expected retur n proxy arithmetic average return is more sufficient than geometric mean as it is break in estimating an investments pass judgment return over a proximo horizon found on its retiring(a) carrying out (geometric mean is a breach description of long-term historical performance of an investment). Risk-free interest rate victorious into method of accounting the above, arithmetic average yearly returns of long-term U.S. government gravels for the period 1951-1987 (4.88%, conceive addition 1) isconsidered to be risk-free rate for lodging division. Arithmetic average yearbook returns of short-term U.S. government bonds for year 1987 (5.46%, memorize Case establish 4) is considered to be risk-free rate for restaurant and contract work divisions. Market proxyS&P viosterol index is selected as a market proxy as it is believed to be close to the true market portfolio. As it is important to use historical returns for the akin market index used to calculate beta (which is presu mptuousness), an assumption is made that the habituated supplement data is calculate based on the same S&P 500 index. Market risk giftMarket risk premium should be calculated for the same horizon as that used for the risk-free interest rate. consequently a mete out between S&P 500 composite returns and long-term U.S. government bond returns for the period 1951-1987 (7.88%, exit Appendix 2) is a market risk premium for lodging division. A spread between S&P 500 composite returns and short-term U.S. government bond returns for year 1987 (-0.23%, see Case Exhibit 5) is a market risk premium for restaurant and contract services divisions.How did you measure the cost of debt?Marriott Corporation and each division are addicted market value-target leverage ratios and credit spreads as well as U.S. government interest rates as of April 1988 (see Case Tables A and B). According to investment horizons discussed above, the following cost of debt is estimatedHow did you measure the beta for each division?Ideally, when estimating beta by using past returns, time interval should be consistent with an investment horizon. Betas given in Case Exhibit 3 are estimated over 1986-1987 period. As these are the only betas given, they are assumed to be relevant for both long-term and short-term investment horizons.Equity betas of each division are calculated from comparable to(predicate) hotel and restaurant companies. Equity betas are then unlevered winning into account financing structure of each company according to the following aspectpic, where Tax = 40%An average of unlevered betas of comparable companies is assumed to be a proxy for unlevered betas of Marriott divisions. For calculations of unlevered betas for each division see Appendix 4.What is the weighted average cost of capital for the Marriott Corporation and cost of capital for each of its divisions?WACC is calculated according to the formula given in the case taking into account the tax shield. Cost of equi ty is calculated according to CAPM model.