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Executive Summary
The Marriot Corporation began in 1927 with J. Willard Marriott's root beer stand. In the last 60 years, the Marriot Corporation grew into one of the leading lodging, and food service companies in the United States, with profits of $223 million and sales of $6.5 billion in 1987. The company consists of three divisions; lodging, restaurants and contract services that generate 41, 13, and 46% of sales, respectively. The company's strategy is to be a premier growth company, to be a preferred employer, provider and the most profitable company.
The cost of capital of the Marriott Corporation and its three divisions must be evaluated to decide which investment projects will be selected for the upcoming year. This requires calculating the risk of each division based on the comparable companies in the market. Once the cost of capital and the expected return is determined, the divisions can be evaluated for any change in their capital structure.
Assumptions
1) The tax rate was determined to be 41.6% on average based on the Financial History of Marriott Corporation from 1978 to 1987.
2) Marriott Corporation used long-term debt for the cost of debt for its lodging, therefore the 30-year US Government Interest Rate of 8.95% was used for this case analysis. This is to be consistent to match the time frame of long-term debt.
3) Marriott Corporation used the cost of short-term debt as the cost of debt for its restaurant and contract services, therefore a 1-year US Government Interest Rate was used for this case analysis. The 1-ye ...