# Marriott Cost of Capital

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EF5142- Individual Case Questions: “Marriott Corporation: The Cost of Capital” 1. What is Marriott’s target debt-to-value ratio (i.e. what is their target Debt/(Debt+Equity)]? Target D/(D+E) = 60% (source: table A) &lt;==&gt; D/(D+E) = 0,6 and E/(D+E) = 0,4 D/(D+E) x (D+E)/E = D/E = 0,6/0,4 = 1,5 ==&gt; target D/E ratio = 1,5 2. As of the 1987, what was Marriott’s actual debt-to-value ratio? Actual long-term debt value = \$2498,8 million Actual equity value = 118,8 million of shares x \$30 = \$3564 million ==&gt; actual debt-to-value ratio = 2498,8/3564 = 0,70 3. What is the estimate for Marriott’s equity beta? Equity beta at current ratio = [1 + (1-TC) x Debt/Equity] x unlevered beta The equity beta of Marriott is 0.97 (linear regression analysis on historical common stock) &lt;==&gt; 0.97 = [1 + (1-0.34) x 0.70] x unlevered beta &lt;==&gt; 0.66 = unlevered beta Equity beta at target ratio = [1 + (1-0.34) x 1.5] x 0.66 Equity beta at target ratio = 1.32 Using this estimate and other details reported in the case, what do you predict the equity beta of Marriott would be if they had no debt in their capital structure? If Marriott decide to deleverage totally their capital structure, their equity beta will come down significantly. Indeed, the more debt Marriott have, the more risky is their equity (because their financial risk increases with their leverage ratio, even if their operational risk remains the same). Actually, debt holders are the first to be repaid through cash flows. However, deleveraging the capital structure doesn't mean that the Marriott's cost of capital will decrease. Indeed, the cost of debt is lower than the cost of equity (even if the equity beta is lower). Consequently, Marriott should better seek the optimal balance between debt and equity, in order to minimize their cost of capital and then to