Question
Marriott has three main divisions: lodging, restaurants, and contract services, with a weighted average cost of capital (WACC) of 10%, 12% and 14% respectively. Marriotts
Marriott has three main divisions: lodging, restaurants, and contract services, with a weighted average cost of capital (WACC) of 10%, 12% and 14% respectively. Marriotts corporate-wide cost of capital, a blend of these divisional costs of capital is estimated to be 12%. Assume that each division has access to an identical set of projects for each time period in the future: Project A with a return on assets (ROA) of 15%, project B with a ROA of 13%, and project C with a ROA of 11%. Assume that these projects are identical in size, as measured by the amount of capital needed to invest in each of these projects. Further assume that the three divisions are equal in size, as measured by their market value of assets at this time. Marriott has decided to change its investment policy at this time and plans to use the corporate-wide cost of capital of 12% instead of the divisional cost of capital to evaluate investment opportunities (i.e., projects) in each of its lines of business in future. Would the contract services division grow faster or slower or at the same rate as the restaurants division over time as a result of this policy change? Explain.
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