Marriott Case
1. To solve for Marriott’s WACC, we need to know the cost of equity, cost of debt, and its debt to equity ratio. By dividing the tax 175.9 by income before income tax 398.9(Exhibit 1), we get a corporate income tax rate 44.1%, and we will use 44.1% as tax rate in our calculation.

Cost of Equity: Using the CAPM model to solve for cost of equity, we need to know the Beta of Marriott Corporation. The actual beta of is 1.11 and the actual market leverage ratio D/V= 41%. Since the management of the company have a market value target leverage ratio of 60%, we need to get a new beta:π‘ˆπ‘›π‘™π‘’π‘£π‘’π‘Ÿπ‘’π‘‘ = 1/(1+(1-0.441)41/59)*1.11= 0.7994 π›½πΈπ‘žπ‘’π‘–π‘‘π‘¦ = 0.7994 βˆ— (1 + (1 – 0.441) 60/40) = 1.47

We use the 10 year Government Bond interest rate 8.72% (table B) as our risk-free rate, because Marriott manages hotels and restaurants, and most of these projects are going to last for a long period of time, however, 30 year is too long for other divisions except lodging, so 10 year seems to be reasonable. For equity premium, we will use the average spread between S&P 500 composite returns and Long Term U.S. Bond, which is 7.43% (Exhibit 5). Equity premium by definition is equity return less the risk free rate, since we use 10 year bond interest rate which is a long term bond interest rate, we apply this spread into our calculation. 𝑅𝑒 = 𝑅𝑓 + 𝛽 βˆ— (𝑅𝑀 βˆ’ 𝑅 ) = 8.72+1.47*7.43=19.64%

Cost of Debt: We found that Debt Rate premium above government for Marriott is 1.3% (Table A), and we decide to use 8.72% as risk free rate, so cost of debt =1.3+8.72=10.02%

2. The higher hurdle rate is associated with a higher risk. If we use a single corporate hurdle rate, the more risk we will take in our business operations, because risk associated with the corporate hurdle rate is diversified, if we apply that

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Cost Of Equity And Corporate Income Tax Rate. (June 12, 2021). Retrieved from https://www.freeessays.education/cost-of-equity-and-corporate-income-tax-rate-essay/