Marriot Case – Speaker Notes
Speaker notes
Theoretically say it is appropriate to calculate the cost of capital for each division separately
We Need to estimate all WACC parameters for each division on a standalone basis:
what measure of risk free rate is appropriate
what leverage is sustainable and what cost of debt is realistic for each division – without an effective cross-guarantee of other divisions assets
what cost of equity (equity beta and market risk premium) accurately reflects each divisions risk
The following slides detail how these are addressed by Marriott
This table provided by Marriot shows us the debt capacity for each division, lets do a cross check for debt capacity. The overall firm leverage is calculated as weighted average of divisional leverage and we use the result to compare to firm leverage to see how much difference is , and is it acceptable or not. Because the data about each divisions asset is not provided, we use the identifiable asset as the proxy. This column with the red circle shows the each divisions weights in the company. We also use these weights to calculate the contract service division beta, because Marriot hasnt provided any comparable company for contract service division.
Column A is divisions debt capacity, column B is each divisions weight, we multiply A by B, and add them (weighted leverage) together, we get the Marriotts leverage which is 60.8%, and the difference is acceptable.
Now I will pass the presentation to salil, he will talk about the cost of equity, the wacc and other issues.