Company’s objective

The operating strategy of the company was made with an aim of achieving the following objective over the years, while continuing the trend of growth:

  • To maintain the position of the leading growth company.
  • To be the most preferred employer.
  • To be the most preferred provider.
  • And lastly to be one of the most profitable company.

Components of WACC for Marriott

WACC = (1 –)  (D / V) +  (E/V)

E = market value of equity

D = market value of debt

V= value of the firm

= corporate tax rate

= after tax cost of equity

= pre-tax cost of debt

WACC calculations

Marriott      
Equity Beta Tax rate D/E
0.97 44% 1.50
Beta of Marriott 0.53  

 

lodging division
Market value leverage Levered Beta (Equity Beta) Tax rate D/E Unlevered beta
Hilton 14% 0.88 0% 0.162790698 0.76
Holiday 79% 1.46 0% 3.761904762 0.31
La quinta 69% 0.38 0% 2.225806452 0.12
Ramada 65% 0.95 0% 1.857142857 0.33
average unlevered beta 0.38
(Re-levered) beta of lodging division 1.46

 

restaurant division          
Market value leverage Levered Beta (Equity Beta) Tax rate D/E Unlevered beta
Church 4% 0.75 0% 0.041666667 0.72
Collins foods 10% 0.60 0% 0.111111111 0.54
Frisch 6% 0.13 0% 0.063829787 0.12
Luby’s 1% 0.64 0% 0.01010101 0.63
McDonald’s 23% 1.00 0% 0.298701299 0.77
Wendy’s 21% 1.08 0% 0.265822785 0.85
average unlevered beta 0.61
(Re-levered) beta of restaurant division 1.05

 

Re= Rf + B * (Rm-Rf)        
         
  Marriot lodging contract restaurants
Rf 8.95% 8.95% 6.90% 6.90%
Beta 1.47 1.427 1.47 1.42
Rm-Rf 0.0743 0.0743 0.0895 0.0895
Re (%) 19.89% 19.55% 20.06% 19.61%
Rd (%)= government bond + credit spread 10.25% 10.05% 10.35% 10.75%

 

WACC calculation        
Marriot lodging contract restaurants
t 44% 44% 44% 44%
(1 – t) 56% 56% 56% 56%
10.25% 10.05% 10.35% 10.75%
12.87% 19.76% -0.31% 16.04%
D/V 60% 74% 40% 42%
E/V 40% 26% 60% 58%
WACC 8.58% 9.30% 2.13% 11.83%

Comparison between the WACC

Using the formula of WACC, the company was able to determine the weighted average cost of capital for each of its division. As per the calculation done the WACC for the lodging services is around 9.30 % while the hurdle rates for restaurants is 11.83% and for contract services is equal to 2.13%…………

 

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