How does Marriott use its costs of capital
1. a How does Marriott use its costs of capital (both at division- and firm-levels)? Does this make sense to you? (1 point)
b. Refer to Figure A in the case. Suppose Marriott uses a 9% hurdle rate for its hotel division, while the true cost of capital is 12%. For a $100m hotel investment, how much (in dollar terms) will Marriott expect to gain or lose on a typical hotel? How much (in dollar terms) will they actually gain or lose on a typical hotel? (1 point)
Clarification: Assume the following values on the y-axis for each point on the x-axis.
Hurdle rate (%) 7 8 9 10 11 12
Profit rate (%) 40 25 10 0 -7.5 -15
2. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of businesses, what would happen to the riskiness of the company’s assets over time? (1 point)
a.What is the cost of capital for the lodging and restaurant divisions of Marriott? Please justify your choice of comparable firms for both divisions to estimate division-level asset betas. (5 points)
Hint 1: Recall that asset betas (not equity betas) can be compared across firms when firms have different degrees of financial leverage. The formula for converting between equity betas and asset betas (assuming debt betas are 0) is: βE = βA [1+ (D/E)·(1-τ)]
Hint 2: Please make your own assumption on tax rates and justify it.
b. How can you estimate the cost of capital for the contract services division, for which there is no information on publicly traded comparable companies? (Please explain the process qualitatively; that is, you are not required to actually compute the cost of capital for contract services) (2 points)