Marriott Corporation: the Cost of Capital
Marriott Case 1. What is the WACC for Marriott Corporation? Cost of Debt Tax Rate We determined this number by taking income taxes paid/EBITDA = 175.9/398.9 = 44.1% Return on debt There are two clear components of debt: fixed and floating. In order to get the fixed debt rate we took the interest rates on fixed-rate government securities and added the premium above the government rate. The floating aspect is priced into the premium above the government rate. We used the 30-year maturity for the cost of debt on Marriott Corp and the Lodging division. We did this because both the Lodging division’s assets and the company have long useful lives. We used a 10-year maturity for the cost of debt on the Restaurant division. We did this because the useful life of the assets in a restaurant are not as long-term as those in Lodging, but are also not extremely short-term. We used a 1-year maturity for the cost of debt on the Contract Services division. We did this because the useful life of the assets in this division is very short. COST OF DEBT | | | | | Fixed-rate US Government Securities | | Maturity | Rate | | | | | 30 year | 8.95% | | | | | 10 year | 8.72% | | | | | 1 year | 6.90% | | | | | | | | | | | | | | Rate | Debt Rate Premium | Total Fixed Cost of Debt | Marriott | | | 8.95% | 1.3% | 10.2500% | Lodging | | | 8.95% | 1.1% | 10.0500% | Restaurants | | | 8.72% | 1.4% | 10.1200% | Contract Services | | 6.9% | 1.8% | 8.700% | Debt part of WACCMAR = (1-TC)(RD)(WD) = (1-.441)(.1025)(.6) = 3.44% Cost of Equity RE = CAPM = RF + (RM – RF) Determining a risk-free rate:
We always want to use duration matching;
We always want to use duration matching;