Marriott Corporation: The Cost of CapitalSuggested Questions:

1. How does Marriott use its estimate of its cost of capital? Does this make sense?

Marriott uses the WACC (=Weighted Average Cost of Capital) for determine the opportunity cost of capital. It is useful for making decisions about whether a project should be realized or not. Projects are only profitable if their return rate is higher than the WACC. So far it does make sense to use its estimate of the cost of capital.Marriott requires three inputs for measuring the cost of capital: debt capacity, debt cost and equity cost. They evaluated the cost of capital for the whole corporation and in addition for each of the three divisions individually. This also makes sense because the three inputs for measuring could differ in each of the divisions and so the cost of capital also varies. Another point is that most of the projects are related to one division, so its more logical to use the divisions WACC rather than the WACC of the whole corporation for deciding whether the project should be realized or not.Furthermore Marriott used the cost of capital for projects with the proper hurdle rate to get the NPV by calculation it with the discounted cash flow method.2. What is the weighted average cost of capital for Marriott Corporation? As per the attached excel file.3. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? It isnt recommendable to use only a single corporate hurdle rate in each of their divisions. Every division has another risk and this also affects the hurdle rate. So the hurdle rates in every division are different and vary from the overall hurdle rate. The rate is usually used to classify reasonable investments and a single rate could lead to wrong decisions. Risky investments may appear more profitable as they actually are and less risky projects may appear less reasonable and profitable. On a long term basis this could increase the operating risk and so affect the profit in a negative way. It only could be favorable if all projects would have the same beta factor.

4. What is the cost of capital for its lodging business?As per the attached excel file.

5. What is the cost of capital for its restaurant business?As per the attached excel file.

6. What is the cost of capital for its contract services division? How do you estimate its equity costs without publicly traded comparable companies?As per the attached excel file.7. What are the differences in the hurdle rates across Marriotts businesses? Do these differences make sense?

WACC MARRIOTT11.22429974

WACC LODGING7.914867261

WACC RESTURANTS9.753855465

WACC CONTRACT SERVICES6.538112919

We can see that if we have a common WACC for all projects most of the projects wouldnt have given the NPV positive result because of the high Marriotts WACC. Therefore we should look for individual WACC.