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Marriott Corporation Executive Summary: Marriott Corporation is determining the weighted average cost of capital (WACC) to use as the hurdle rates for future projects
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Submitted by vbstarjds on March 11, 2008
Category: Business
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Executive Summary:
Marriott Corporation is determining the weighted average cost of capital (WACC) to use as the hurdle rates for future projects and compensation. In determining this, there is both a portfolio rate (which includes all divisions) and rates for each individual division. These divisions are split into different categories rather than using only a single rate for Marriott because the levels of risk vary from division to division. Although there is a determinable risk rate for Marriot as a whole, Marriott should use the separate divisional rates when determining possible future projects and employee compensation. In evaluating Marriot and the market, the WACC for all four is as follows:
Marriott 8.11%
Lodging 7.02%
Contract Services 8.21%
Restaurant 9.10%
Findings and Analysis
WACC Summary
WACC (the hurdle rate or required rate) is extremely important for business operations and future projects. Poor decisions will be made if the wrong WACC is determined. The cost of capital depends mainly on the use of the funds, and not the source. This is due to the different risks that are involved in different lines of business. Because this is true, the cost of capital for each division must be determined independently from the other divisions. Therefore, it would be incorrect to use a single cost of capital for Marriott's various divisions as each has it own risk factors. Thus, there should be and are three distinct hurdle rates for the individual divisions.
Since there is no pure way of determining the correct hurdle rate, because we cannot observe it in the market, we must determined the rate by comparing our line of business to companies in the same line of business (those that have the most similar risk classes). Strictly speaking, only if the proposed investment is a replica of the firm's existing operations will the firm's WACC be...
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