Marriott Case Assignment

Notes:
1.
This is a group assignment. Groups are permitted to seek guidance from others in
understanding the concepts underlying this assignment, but each group must work
independently in the actual preparation of spreadsheets and answers.
2.

This assignment is to be completed using Excel. Begin with the Excel template file for
the case. Put your calculations/formulas in the worksheet labeled Answers. Summarize
your results on the worksheet labeled Summary. On the summary, use formulas to
reference the answers in the Answers worksheet. All your work must be in one single
file but you may use multiple worksheets if needed. Be sure to label your worksheets.
You must submit your Excel files on Blackboard by 2:00 p.m. on the due date.

3.

You must also turn in a hard copy report of this assignment by the beginning of
class on the due date. Attach a cover page to the front of your report. The cover page is
now available on Blackboard. Each group member must sign the cover page to
indicate he/she contributed to the case. The format of your spreadsheet is up to you but
must be summarized in the summary table in the Excel template. (Note: Your summary
table should reference the answers calculated elsewhere in the spreadsheet.) Your hard
copy should include only the summary table plus essay answers to questions #4 & #6.

Assignment (for all groups):

The goal of the case is to estimate the cost of capital for Marriott Corporation and for each of its
divisions. The case is set in April, 1988, and the cost of capital estimates are to be used by the
company in evaluating future projects. In particular, each divisions cost of capital estimate is to
be used as the hurdle rate in evaluating investment opportunities for that division. The steps
listed below will guide you in estimating the cost of capital.
1.

Determine the weighted average cost of capital for Marriott Corporation as a whole.
Remember that the equity beta provided in the case is a levered beta, reflecting the
companys 1987 debt/equity ratio. You need to unlever the beta and then relever it, using
the companys target leverage ratio (Table A), before using the beta in determining the
cost of equity.

2.

Determine the weighted average cost of capital for the lodging division and for the
restaurant division. Use the information provided on comparable companies to calculate
an equally-weighted average unlevered equity beta. (Note: Be sure to unlever each
individual companys beta first, then find the average.) Next, relever the average beta,
using the target leverage ratio (Table A), to find the levered equity beta for each division.
Use this relevered beta in determining the cost of equity for the division. (Note: All of the
companies listed in Exhibit 3 are considered comparable to one of Marriotts divisions. In
other words, you do not need to decide which companies are most comparable to
Marriott. Also, each company is used for just one of the divisions.)

3.

Repeat #2. This time, instead of equally-weighting the unlevered betas, weight the
unlevered betas of the competitors by their 1987 sales revenues. This puts greater weight
on larger companies.

4.

Compare your costs of equity and WACCs for #2 and #3. What impact does weighting
the betas have on the cost of capital estimates? Which method is preferable for
calculating the cost of equity and WACC of the lodging division? Discuss why. Is the
same method preferable for calculating the cost of equity and WACC of the restaurant
division? Discuss why or why not.

5.

Determine the weighted average cost of capital for the contract services division. Since
there are no publicly traded comparable companies, the pure play approach (as used for
the lodging and restaurant divisions) cannot be used for this division. However, the equity
beta of a whole company is a weighted average of the equity betas of the divisions of that
company. Thus, the unlevered equity beta of Marriott as a whole and the unlevered equity
betas of the lodging and restaurant divisions can be used to infer the unlevered beta of the
contract services division. (Note: Use dollar values of identifiable assets, provided in
Exhibit 2, for weighting the divisions.) This unlevered beta can then be relevered, using
the target leverage ratio of the contract services division (Table A). Use this relevered
equity beta in determining the cost of equity for the division. (Note: Step #5 will need to
be done 2 times, once using the estimates from step #2 and once using the estimates from
step #3.)

6.

Summarize your results in the summary table provided on Blackboard. Consider that the
calculated WACCs are to be used by the company as hurdle rates for evaluating
investment opportunities. Consider also the types of business in each of the three
divisions. Write an essay discussing differences you observe among the WACCs and
whether these make sense in relation to the business of the divisions in 1988. Next,
considering more recent economic conditions (the past several years), do you think the
relative WACCs of these divisions (if they still existed together as Marriott Corporation)
would be different if the calculations were repeated today? Explain why or why not.

Other information:
a.
When calculating the cost of debt, for divisions or for the company as a whole, use the
debt premiums listed in Table A of the case. Remember that these are risk premiums
that must be added to the appropriate government interest rates (i.e., risk-free rates).
b.

When unlevering and relevering betas, do take tax effects into consideration.

c.

Assume a 35.5% tax rate for Marriott and for each of its divisions.

d.

Market information needed to calculate cost of equity and cost of debt is provided in
Table B and Exhibits 4 and 5 of the case. If you choose to use the 10-year government
rate (Table B) as the risk-free rate, there is no corresponding historical data. You will
need to use Long-term U.S. government bond returns when deciding on the market risk
premium. This is the same risk premium you would use if you choose to use the 30-year

government rate as the risk-free rate. The calculated cost of capital can vary greatly
depending on which market data is used. Think carefully about your choices!
e.

Be careful when deciding which capital structure value to use when unlevering Marriotts
beta because there are 3 different debt/value ratios for 1987 listed in the case: 58.8%
(Exhibit 1), 59% (in the text of the case; same as Exhibit 1 but value is rounded), and
41% (Exhibit 3). Read the footnotes to the exhibits and think about which value is the
best choice.

f.

All betas and WACCs should be rounded to four decimal places.

Additional Assignment (only for groups presenting the case):

1.

Write a brief history of Marriott Corporation from its founding until present. (Note:
Marriot has undergone reorganizations and is now called Marriott International, Inc.)
The history should include a description of the companys current business and any
significant financial events (e.g., IPO, spinoffs, etc.) that have occurred over the life of
the company. Search The Wall Street Journal Index (in library) for relevant events.
Include a list of the references used to obtain information about the company.

2.

Research the company reorganization that occurred in 1993 (first announced in 1992) that
split Marriott Corporation into Marriott International and Host Marriott Corporation.
Search The Wall Street Journal Index (in library) for articles discussing the
reorganization. Describe the reorganization and explain why the bondholders of Marriott
Corporation were unhappy with the reorganization plan. Did the bondholders have any
legal recourse? Explain why or why not. What was the outcome? Include a list of the
titles and dates of the WSJ articles used to answer this question.

3.

Various sources provide beta measures. Cite at least 3 different sources and the current
beta listed for Marriott International (ticker: MAR) on each source. Why do you think
the sources list different betas for the same company? To answer this question, research
how betas listed by your various sources are calculated. Use the beta listed on the
NYSEs website for the next question.

4.

Determine Marriotts capital structure at the end of fiscal year 2014. (Obtain the balance
sheet from the 2014 annual report provided on Marriotts website.) Unlever Marriotts
current beta (from the NYSEs website) using the firms capital structure at the end of
fiscal year 2014. Then relever using the target leverage ratio of 60% described in the
case. How does this current relevered beta compare to the beta calculated in the case for
1988? Changes in the nature of Marriotts business, due to reorganizations, can explain
some of the difference. What else can explain differences in the current beta and the beta
in 1988, the setting of the case?

5.

If the relevered beta (calculated in #4) had been Marriotts beta in 1988, what would have
been the companys WACC? To answer this question, use the relevered beta (calculated
in #4) with the debt premium and market information provided in the case to calculate the

WACC of Marriott. How does this WACC compare to the WACC calculated using the
1988 beta? Can you explain any difference you find? (Note: Calculating the WACC
using financial data from the setting of the case is not a realistic estimate of Marriotts
WACC today. You are simply trying to see the difference in the WACC when the beta is
changed.)
6.

Consider current economic conditions. Research recent articles about Marriott. What
impact do you expect current economic conditions to have on Marriotts existing lines of
business? What, if any, impact do you expect this to have on Marriotts future stock price
movements? Explain your answer. Include a list of the titles and dates of the WSJ
articles used in preparing your answer to this question.