FIN 419: SPRING 2016 GROUP PROJECT 2
Read the case study of Marriott’s Corporation, answer the following questions:
Use the excel tables attached. Due date is Apr. 13, 2015.
- Are the four components of Marriott’s financial strategy consistent with its growth opportunity?
- How does Marriott use its estimate of its cost of capital? Does this make sense?
- It is important to understand that hurdle rate plays a central role in Marriott’s financial strategy. Explain how hurdle rates are used at Marriott in the following three activities: a. Share repurchases b. Capital Investments and syndications c. Executive compensation
- How should hurdle rates be determined?
- What steps for the computation of equity costs and debt costs are required to estimate Marriott’s WACC?
- Explain how the CAPM is used to compute equity costs. Should the risk-free rate be a short rate or long-term rate? What time period should be used to measure the risk premium?
- Compute the WACC for Marriott Corporation. What risk-free rate and risk premium did you use to calculate the cost of equity? How did you measure Marriott’s cost of debt?
- What type of investments would you value using Marriott’s WACC?
[Divisional Hurdle Rates]
- What is the overall WACC used for? When should Marriott use divisional hurdle rates?
- If Marriott uses a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time?
- Explain how divisional hurdle rates are measured? a. Using comparables to get divisional betas b. Divisional leverage and debt rates
- Estimate the hurdle rates of each division.
- What are the differences in the hurdle rates across Marriott’s business? Do these differences make sense?