WACC (Divisional Discount or Hurdle Rate) CalculationsFour Key Elements of WACC

Unlevered β = Levered β × Equity Ratio

Sector

Marriot Corporation 1.11

Lodging

HILTON HOTELS CORPORATION 0.76(owns, manages, and licenses hotels. Operates casinos.)HOLIDAY CORPORATION(Owns, operates, and licenses hotels and restaurants. 1.35Operates casinos.)LA QUINTA MOTOR INNS 0.89(Owns, operates, and licenses motor inns.)RAMADA INNS, INC. 1.36(Owns and operates hotels and restaurants.)

Restaurants

CHURCH'S FRIED CHICKEN 1.45(owns and franchises restaurants and gaming businesses.)COLLINS FOODS INTERNATIONAL 1.45(Operates Kentucky Fried Chicken franchiseand moderately prices restaurants.)FRISCH'S RESTAURANTS 0.57(Operates and franchises restaurants.)LUBY'S CAFETERIAS 0.76(Operates Cafeterias.)MCDONALD'S 0.94(Operates, franchises, and services restaurants.)WENDY'S INTERNATIONAL 1.32(Operates, franchises, and services restaurants.)

1 - Unlevered Beta2- Levered Beta3- Cost of Equity4- Cost of Debt 5- Tax Rate

Unlevered βU Estimation

Equity β

Contract & Services

Division Total Identifiable AssetMarriot 4582.7Lodging 4582.7Restaurant 4582.7Contract & Services 4582.7

levered β = UnLevered β / Equity Ratio

SectorMarriot 0.6549Lodging 0.422Restaurant 0.959Contract & Services 1.132

Cost of Equity Estimation

Note : Expected Market Rate = 12.01% (exhibit 4)Risk Free Rate

Marriot 8.95%Lodging 8.95%Restaurant 8.72%Contract & Sevices 8.72%

Cost of Debt EstimationCost of Debt = Risk free Rate + Debt Rate Premium

Risk Free RateMarriot 8.95%Lodging 8.95%Restaurant 8.72%Contract & Sevices 8.72%

Tax Rate EstimationTax Rate = Income Tax / Income Before Interest Tax

Period Income Taxes1978 35.4

Note : In order to find contract & services beta, we opt weighted average approach in which weight corresponds to assets ratio i.e. divisional identifiable asset/total identifiable asset

βM = WLβL+WRβR+WCβC

βC = 1.132

levered βL Estimation

Unlevered β

Cost of Equity = Risk Free Rate + βL (Market Risk Premium)Where Market Risk Premium = Expected Market Rate - Risk Free Rate

1979 43.81980 40.61981 45.21982 50.21983 76.71984 100.81985 128.31986 168.51987 175.9

Weighted Average Cost of Capital (WACC)WACC = (1-tax rate)xCost of Debt x (D/V) + Cost of Equity x (E/V)

Tax RateMarriot 0.42Lodging 0.42Restaurants 0.42Contract & Services 0.42

Conclusion : The hurdle rate that marriot should use is 9.15%. This rate is subjected to variations in market risk premium. Moreover, if government interest rate changes, then this hurdle rate sould be accounted for this change.

WACC (Divisional Discount or Hurdle Rate) CalculationsFour Key Elements of WACC

Unlevered β = Levered β × Equity Ratio

41% 59% 0.6549

14% 86% 0.6536

79% 21% 0.2835

69% 31% 0.2759

65% 35% 0.476

0.422

4% 96% 1.392

10% 90% 1.305

6% 94% 0.5358

1% 99% 0.7524

23% 77% 0.7238

21% 79% 1.0428

0.959

Unlevered βU Estimation

Market Leverage RatioD/E+D

Equity Ratio E/D+E

Unlevered β

Lodging Average β

Restaurants Average β

Divisional Identifiable Asset Weight- - 0.655

2777.4 0.606 0.4221237.7 0.270 0.959567.7 0.124 ?

levered β = UnLevered β / Equity Ratio

Target Leverage Raios Equity Ratio60% 40% 1.63774% 26% 1.62440% 60% 1.59842% 58% 1.952

Cost of Equity Estimation

Market Risk Premium COE3.06% 1.637 13.96%3.06% 1.624 13.92%3.29% 1.598 13.98%3.29% 1.952 15.14%

Cost of Debt EstimationCost of Debt = Risk free Rate + Debt Rate Premium

Debt Rate Premium Cost of Debt1.30% 10.25%1.10% 10.05%1.40% 10.12%1.80% 10.52%

Tax Rate EstimationTax Rate = Income Tax / Income Before Interest Tax

IBIT Tax Rate (%)83.5 42.40

Note : In order to find contract & services beta, we opt weighted average approach in which weight corresponds to assets ratio i.e. divisional identifiable asset/total

Unlevered βU

levered βL Estimation

levered β

Cost of Equity = Risk Free Rate + βL (Market Risk Premium)Where Market Risk Premium = Expected Market Rate - Risk Free Rate

βL

105.6 41.48103.5 39.23121.3 37.26133.7 37.55185.1 41.44236.1 42.69295.7 43.39360.2 46.78398.9 44.10

Average Tax Rate 41.63

Weighted Average Cost of Capital (WACC)WACC = (1-tax rate)xCost of Debt x (D/V) + Cost of Equity x (E/V)

Cost of Debt D/V Cost of Equity E/V WACC10.25% 0.6 13.96% 0.4 9.15%10.05% 0.74 13.92% 0.26 7.93%10.12% 0.4 13.98% 0.6 10.73%10.52% 0.42 15.14% 0.58 11.34%

Conclusion : The hurdle rate that marriot should use is 9.15%. This rate is subjected to variations in market risk premium. Moreover, if government interest rate