Marriott Case Study Essays

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

According to the company’s annual report in 2009, the Federal statutory tax rate is 35%. Along with the above analysis, we have gathered all the key information necessary to estimate the WACC as following:

WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity

The appropriate discount rate was calculated using WACC formula as shown in the ‘WACC’ exhibit using the following assumptions:

The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

in which wd is the proportion of Southwest’s assets financed by debt, ws is the proportion of Southwest’s assets financed by equity, rd is the required return on debt, rs is the required return on equity, and T is Southwest’s marginal tax rate.

Lastly, the interest rate was calculated by dividing interest expense by long-term debt for the company. These numbers, along with equity and debt data given to us in the case, resulted in a WACC of 13.89%.

Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.

7. What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without

The Equity beta for the whole company and for the commercial division is calculated in the appendix.

We assume that the debt of these companies is risk free, because debt represents only a small fraction of the firm’s value.

For the calculation of equity, beta is a necessity because there is no comparison that matches its operational profile. Beta 1.17 ke = (4.58%+1.17) =

3. Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%.

WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.

For beta, there are mainly two different ways to calculate the value for beta. The first is to calculate it yourself based on historical data. By using this method, you run the risk of using inaccurate data if you choose a period that is too broad or narrow. Conversely, the other way to determine it is to use published sources such as Bloomberg and Standard & Poor’s. Similar to using historical data to determine beta, there are variations in these published sources for the values of beta. As a result, the calculation of the overall cost of capital will vary depending on which source of beta you