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Rock Street, San Francisco

This case study is about the cost of capital based on the example of Marriott Corporation around the year 1988, when this company is one of the leading lodging and food service companies in the United States and with more than six billion USD of revenues, the biggest company on the comparable companies list (Exhibit 3, p. 9).
First, we estimate the asset beta for each of Marriott’s main divisions, using a group of comparable companies as proxy companies. Second, we calculate the equity betas for each of Marriott’s main divisions, using the asset betas calculated before. Third, we calculate the all equity opportunity cost of capital and the cost of equity for each of Marriott’s main divisions using the estimated asset beta and the calculated equity beta. And fourth, we explain the consequences, if Marriott was to use only one cost of capital for all investment project evaluations. For each step, we provide an explanation for the formulas we used and the assumptions we made.

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