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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.

[Overall WACC]

  1. Are the four components of Marriott’s financial strategy consistent with its growth opportunity?
  2. How does Marriott use its estimate of its cost of capital? Does this make sense?
  3. 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
  4. How should hurdle rates be determined?
  5. What steps for the computation of equity costs and debt costs are required to estimate Marriott’s WACC?
  6. 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?
  7. 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?
  8. What type of investments would you value using Marriott’s WACC?

[Divisional Hurdle Rates]

  1. What is the overall WACC used for? When should Marriott use divisional hurdle rates?
  2. 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?
  3. Explain how divisional hurdle rates are measured? a. Using comparables to get divisional betas b. Divisional leverage and debt rates
  4. Estimate the hurdle rates of each division.
  5. What are the differences in the hurdle rates across Marriott’s business? Do these differences make sense?

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