Case 1 Marriot Cost of Capital
The primary objective of this case is to estimate and analyze the cost of capital for a firm and its non-publicly traded divisions with differing risk characteristics.
The following is a list of questions that may help you analyze the case, but you dont have to
limit your analysis to them. Assume a marginal tax rate of 42%. For purposes of your analysis, use arithmetic instead of geometric averages where averages are necessary. For purposes of your analysis, use the long-term treasury rates as the benchmark for estimating the cost of debt, and if you wish, you can ignore the fact that some of the debt is floating rate.
1. How does Marriott use its estimate of its cost of capital? Does this make sense? 2. What is Marriott’s overall cost of capital?
3. What risk-free rate did you use in your calculation? That is, short-term or long-term? Current or historical average? Why?
4. What risk premium did you use to calculate the cost of equity? 5. How did you measure Marriott’s cost of debt?
6. What type of investments would you value using Marriott’s overall weighted cost of capital (WACC)?
7. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?
8. What is the cost of capital for Marriott’s lodging and restaurant divisions (note: use the same “for purposes of your analysis” notes described above where applicable)?
9. What risk-free rate and risk premium did you use to calculate the cost of equity for each division? Why did you choose these numbers?
10. How did you measure each division’s cost of debt? Should the debt cost differ across divisions? Why?
11. How did you measure the beta of each division?
12. What is the cost of capital for Marriott’s contract services division? (Note that the case does not provide any information regarding publicly traded comparable companies for contract service)
reply to that student in 50 word each 1/ There are few glaring reasons behind the upward trend of inflation the last year and a half, the most obvious is the influx of cash injected into the economy to encourage people to spend towards the end of 2020. Another is the disrupted balance of spending locally as opposed to spending done internationally. One of the reasons I would like to touch upon is the disruption of the supply chain particularly in ocean transport due to the pandemic and the shift in consumption as travel was severly affected by lockdowns. As Americans were forced to spend the summer within their homes or inside the country in general, demand for household items rose and many raw materials for the manufacturing of such products come from China. Due to the increase demand, shipping containers came to the America and Europe but never made it back to China in regular intervals due to their strict lockdown protocols. This resulted in containers being stranded in mostly third world countries who could not afford to send back mostly empty containers back to China. This led to sharp increase in the cost of securing containers from China and the resulting supply chain issues that would disrupt most of the world. Containers that would normally cost 1000 to 2000 dollars were now going for tenfold the cost and these cost were passed down the supply chain to ultimately the consumer. On top of these costs, the labor shortage also attributed cosst in the form of a severe congesting ports all over and transportation to warehouses. The typical cost then for a container would reach almost 30000 dollars once all fees were finalized just to have the contianer reach a warehouse to be customs cleared.For 2022, I believe inflation will end at around 9 % as a result of the holiday shopping season and the continuation of the hot labor market.By 2025 if a recession has not taken a strong hold I believe it would be in 4% and by 2030 we could see a redefinition of normal inflation of 3 to 4 % if energy and climate issues are not dealt with.2/There are 4 main drivers of recent high inflation are:Overall strong demand of goods coupled with a shortage of goods from less manufacturing output due to the pandemic (this includes supply chain issues which costs has been passed on to the final consumer) Rising crude oil prices and commodities (nickel, soybean, grain, corn) as a result from Russia-Ukraine war Increased government spending as COVID-relief awarded by the Federal Government to business and Individuals. Federal Reserve has spent excesivelly in US treasury securities which has greatly increased money supply in the markets. I expect that inflation reached an inflection point in June 2022. I expect the fed to increase fed funds rate around 125 to 200 basis points in .50 to .75 increments from August 2022 to August 2023. In this regard, I expect that inflation will be brought back to normal levels(around 3%) by the 1st quarter of 2024. The reason behind this long time frame is because the fed is raising rates conservatively to prevent adverse impacts to the financial markets. I expect that inflation both in 2025 and 2030 be at normal levels of around 3% unless there is a global downturn or a sharp increase in crude oil prices (this risk may be mitigated as a result of the shift to renewable and fuel alternatives).