FNCE 203, Spring 2011 Professor Opp In this case, you will use the CAPM model to compute the cost of capital for a whole company and for each of its divisions. In your analysis, you can make the following assumptions: * You may use 34% as the corporate tax rate {after the 1936 Tax Reform Act]. * The equity beta values in Exhibit 3 are based on the capital structure in place in 198?. * Credit spread (the premium for Marriott debt above the current government rates) already reflects any adjustment forthe presence of floating rate debt [i.e., don't worry about the presence offloating rate debt in your report]. Your report should clearly show the cost of capital that you would recommend for Marriott as a whole. and for each of its three divisions. To properly use WACC as a measure for the overall cost of capital, you need to consider the following issues. 1. Market risk premium: How long of an estimation window (Le. how far back in history should you go to calculate it]? Should the risk premium be relative to Tbills [maturities of one year or less} or Tbonds [maturities of ten yea rs or longer)? Justify. 2. Riskfree rate: Marriott's restaurant and contract service divisions can be thought of as having project lives of around ten years, its lodging division and Marriott as a whole have longer economic lives. Which is the more appropriate riskfree rate to use? Would you use the current {spot} government interest rate or the historical ave rage? Justify