Marriot Essay

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Marriott Corporation: The Cost of Capital Case Assignment 4a. The risk free rate we used is 8.95% for lodging and 8.72% for the restaurant division. These rates were given in Table B of the case. We used 8.95% for lodging which equates to the maturity of a 30-year government bond and 8.72% was the rate for a 10-year government bond. We chose those two rates because it matched the duration of the assets in both divisions. We anticipate the lodging division to have long life assets that may likely last around 30 years. And we believe the assets for restaurant may last closer to 10 years. The risk premium rate we used is 7.43% for lodging division and 8.47% for the restaurant division. These numbers were provided in Exhibit 5 of the case. 7.43% was the spread between the S&P 500 and long-term government bonds and 8.47% was the spread between the S&P 500 and short-term government bonds. Like the risk free rate, these numbers were chosen to match the duration of the assets. 4b. Cost of debt Both the lodging and restaurant division’s debt used a blended rate made up of a floating rate and a fixed rate. For the cost of debt in the lodging division, we multiplied 50% of the debt by the floating rate and added that to the remaining 50%, which was multiplied by the fixed rate. Consistent with the definition that a floating rate is an adjustable short-term interest rate, our floating rate was determined by adding the given debt rate premium of 1.10% to the short-term (1-year) government interest rate of 6.90%, giving us a floating rate of

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