Harvard Case: Marriott Corporation: The Cost of Capital

1. a. Calculate Marriotts current unlevered beta. Explain, label, and show your necessary calculations. (0.35 point) b. Marriott is projecting that their future percentage of debt in their capital structure will increase to about 60 percent. When that happens to Marriott, calculate what this new levered beta should be. (0.35 point) 2. Calculate the costs of equity, debt, and capital for the Lodging Division below. Make sure that the reader can understand the reasoning that you used when arriving at your answers and clearly label and show your calculations. a. Explain which firms you chose as the pure plays firms to represent the Lodging Division? (0.7 point) b. What are the unlevered betas for each of the firms that you selected? (0.7 point) c. What is the average unlevered beta for the pure play firms that you selected? d. What is the levered beta for the Lodging Division? (0.7 point) e. What is the cost of equity in 1988 for the Lodging Division? Show and explain each number used. (1 point) f. What is the cost of debt for the Lodging Division? (0.7 point) g. What is the overall weighted-average cost of capital (WACC) for the Lodging Division? (0.35 point)

3. Calculate the cost of equity, debt and capital for the Restaurant Division below. Make sure that the reader can understand the reasoning that you used when arriving at your answers and clearly label and show your calculations! a. Explain which firms you chose as the pure play firms to represent the Restaurant Division? (0.7 point) b. What are the unlevered betas for each of the firms that you selected? (0.7 point) c. What is the average unlevered beta for your restaurant divisions pure plays? d. What is the levered beta for the Restaurant Division? (0.7 point) e. What is the cost of equity in 1988 for the Restaurant Division? (1 point) f. What is the cost of the debt for the Restaurant Division? (0.7 point) g. What is the overall weighted-average cost of capital (WACC) for the Restaurant Division? (0.35 point)

4. Finally, you need to calculate the cost of equity and capital for the ServicesDivision. a. Using Marriotts overall firm betas, find the Services Divisions beta. Explain the weighting system that you used to arrive at (or, back-out) this beta. Show your calculations. (2.1 points) b. What is the Services Divisions cost of equity capital? (0.35 point) c. What is the Services Divisions weighted-average cost of capital (WACC)? (0.35 point)