Case Questions:

1. Calculate the cost of capital (WACC) for Marriott as a whole:

Hint: a. Calculate the unlevered asset beta from the equity beta and market leverage.

Find the levered beta using the target debt ratio. Calculate the cost of equity and the WACC.

2. Calculate the cost of capital (WACC) for Lodging:

3. Calculate the cost of capital (WACC) for Restaurants:

4. Calculate the cost of capital (WACC) for Contract Services. Hint: No comparable asset beta is given in this case.

Table A Market-Value Target-Leverage Ratios and Credit Spreads for Marriott and Its Divisions Table B lists the interest rates on fixed-rate U.S. government securities in April 1988. Table B U.S. Government Interest Rates in April 1988 \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|} \hline & 1978 & 1979 & 1980 & 1981 & 1982 & 1983 & 1984 & 1985 & 1986 & 1987 \\ \hline \multicolumn{11}{|l|}{ Summary of Operations } \\ \hline Sales & 1,174.1 & 1,426.0 & 1,633.9 & 1,905.7 & 2,458.9 & 2.950 .5 & 3.524 .9 & 4,241.7 & 5.266 .5 & 6.522 .2 \\ \hline Earnings before interest expense & & & & & & & & & & \\ \hline and income taxes & 107.1 & 133.5 & 150.3 & 173.3 & 205.5 & 247.9 & 297.7 & 371.3 & 420.5 & 489.4 \\ \hline Interest expense & 23.7 & 27.8 & 46.8 & 52.0 & 71.8 & 62.8 & 61.6 & 75.6 & 60.3 & 90.5 \\ \hline Income betore income taxes & 83.5 & 105.6 & 103.5 & 121.3 & 133.7 & 185.1 & 236.1 & 295.7 & 360.2 & 398.9 \\ \hline Income taxes & 35.4 & 43.8 & 40.6 & 45.2 & 50.2 & 76.7 & 100.8 & 128.3 & 168.5 & 175.9 \\ \hline Income from continuing operations a & 48.1 & 61.8 & 62.9 & 76.1 & 83.5 & 108.4 & 135.3 & 167.4 & 191.7 & 223.0 \\ \hline Net income & 54.3 & 71.0 & 72.0 & 86.1 & 94.3 & 115.2 & 139.8 & 167.4 & 191.7 & 223.0 \\ \hline Funds provided from cont. operations b & 101.2 & 117.5 & 125.8 & 160.8 & 203.6 & 272.7 & 322.5 & 372.3 & 430.3 & 472.8 \\ \hline \multicolumn{11}{|l|}{ Capitalization and Returns } \\ \hline Total assets & 1,000.3 & 1,080.4 & 1,214.3 & 1,454.9 & 2,062.6 & 2,501.4 & 2,904.7 & 3,663.8 & 4.579 .3 & 5,370.5 \\ \hline Total capital c & 826.9 & 891.9 & 977.7 & 1,167.5 & 1,634.5 & 2.007 .5 & 2,330.7 & 2,861.4 & 3,561.8 & 4,247,8 \\ \hline Long-term debt & 309.9 & 365.3 & 536.6 & 607.7 & 889.3 & 1,071.6 & 1,115.3 & 1,192.3 & 1,662.8 & 2,498.8 \\ \hline Percent to total capita & 37.5% & 41.0% & 54.9% & 52.1% & 54.4% & 53.4% & 47.9% & 41.7% & 46.7% & 58.8% \\ \hline Shareholders' equity & 418.7 & 413.5 & 311.5 & 421.7 & 516.0 & 628.2 & 675.6 & 848.5 & 991.0 & 810.8 \\ \hline \multicolumn{11}{|l|}{\begin{tabular}{l} Per Share and Other Data \\ Earnings per share: \end{tabular}} \\ \hline Continuing operations & .25 & 34 & .45 & .57 & .61 & .78 & 1.00 & 1.24 & 1.40 & 1.67 \\ \hline Net income & .29 & 39 & .52 & .64 & .69 & 83 & 1.04 & 1.24 & 1.40 & 1.67 \\ \hline Cash dividends & .026 & .034 & .042 & .051 & .063 & .076 & .093 & .113 & .136 & .17 \\ \hline Shareholders' equity & 2.28 & 2.58 & 2.49 & 3.22 & 3.89 & 4.67 & 5.25 & 6.48 & 7.59 & 6.82 \\ \hline Market price at year end & 2.43 & 3.48 & 6.35 & 7.18 & 11.70 & 14.25 & 14.70 & 21.58 & 29.75 & 30.00 \\ \hline Shares outstanding (in millions) & 183.6 & 160.5 & 125.3 & 130.8 & 132.8 & 134.4 & 128.8 & 131.0 & 130.6 & 118.8 \\ \hline Peturn on avg. shareholders' equity & 13.9% & 17.0% & 23.8% & 23.4% & 20.0% & 20.0% & 22.1% & 22.1% & 20.6% & 22.2% \\ \hline \end{tabular} Exhibit 2 Financial Summary of Marriott by Business Segment, 1982-1987 (dollars in millions) Exhibit 3 Information on Comparable Hotel and Restaurant Companies Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987 Fxhihit 5 Snreads hetween S\&P 50 Comnosite Returns and Rond Rates