Marriot Corp Cost of Capital - 2528 Words

Introduction and background We are conducting an analysis of Marriott Corporation for calculating the hurdle rates at each of the firm s three divisions--lodging division, restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate, and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First of all, we will determine the cost of debt, cost of equity and the capital structure for the whole company. Then we will compute for the tax rate, and calculate the WACC for the whole company. After this, we will determine the Risk-free Rates,†¦show more content†¦Strategy #2 conflicts with the company s objective because the company is using hurdle rate to discount cash flows and evaluate potential investments. If Re was higher, then WACC, which is the hurdle rate, would be higher as well. If this was the case, the company s growth would be reduced therefore failing the company s growth objective. If the company s objective is to keep growing by aggressively developing appropriate opportunities, it is best if they do not use their funds to buy back stock shares, even though these shares were undervalued. So strategy #4, which is to repurchase undervalued shares, conflicts with the company s objective. When the company intends to remain a premier growth company, it must aggressively invest in different profitable projects to generate more profit. If Marriott used their funds to buy back stock shares, the available funds for investment would be reduced. This will have a negative effect on the company s growth objective. 2.How does Marriot use its estimate of its cost of capital? Does this make sense? Marriot use cost of capital as the hurdle rate to discount future cash flows for the investment projects of the firm s three divisions. Hurdle rate is the minimum rate of return that is required in order for the company to accept the investment. Marriot use the hurdle rate to calculate the net presentShow MoreRelatedMarriot Corp Case: Cost of Capital1126 Words   |  5 Pagespresident of project finance at Marriott Corporation, prepares recommendations annually for the hurdle rates at each of the firm ¡Ã‚ ¯s three divisions. In this reflective case, the company ¡Ã‚ ¯s policies and strategies related with hurdle rates and cost of capital are discussed. In the above context, the company ¡Ã‚ ¯s policy of repurchasing its shares is also reviewed ; particularly, it focuses on the financial effects there may be if there is a 30% repurchase of the common stock. 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