The primary objective of this case is to give you an opportunity to estimate and analyze the cost of capital for a firm and various non-publicly traded divisions with differing risk characteristics. A general pedagogical objective is to understand how capital market data and the Capital Asset Pricing Model (CAPM) can be used to estimate the required return for real investments. The case also allows you to think about the appropriate time period for estimating expected returns and the implications of using geometric vs. arithmetic averages as measures of expected returns.
This case provides the opportunity for a wealth of analysis and discussion. Focus on what you think is important, and be ready to justify it to your peers, subordinates and superiors. The following is a list of questions they may have for you during the meeting. Be prepared to address them.
How does Marriott use its estimate of its cost of capital? Does this make sense?
What is Marriott's overall cost of capital (COC)?
What risk-free rate did you use in your calculation? That is, short-term or long-term? Current or historical average? Why?
What risk premium did you use to calculate the cost of equity?
For purposes of your analysis, use arithmetic instead of geometric averages where averages are necessary. As/if time permits, we may discuss this issue more fully in class.
How did you measure Marriott's cost of debt?
For purposes of your analysis, use the long-term treasury rates as the benchmark for estimating the cost of debt (that is, ignore the fraction of debt that is fixed vs. floating). As/if time permits, we may discuss this issue more fully in class.
What type of investments would you value using Marriott's overall COC (or weighted average cost of capital ...