In 1987, Marriott focused on the cost of capital. The company was divided into three divisions. The divisions were accommodation, catering and contract services. Marriott was also interested in focusing on four main business points. They decided to focus on managing rather than owning hotel assets, investing in projects that increased shareholder value, optimizing the use of debt in the capital structure, and buying back undervalued shares. They measured these new strategies and how they would affect the company with the weighted average cost of capital (WACC). Our group decided that the most important question was: What is the most efficient calculation and use of WACC for Marriot? We started by selecting an appropriate risk-free rate and market risk premium. The risk-free rate we have selected is 3.48%. In selecting the risk-free rate, we used the geometric average return on short-term Treasury bonds from 1926 to 1987 because this average takes into account time and not the arithmetic average. We used the range from 1926 to 1987, because returns in the shorter time frames were much more volatile and did not predict subsequent years as well. We selected our market risk premium by also using the geometric mean return from 1926 to 1987. After analyzing the spread between S&P 500 composite returns and short-term Treasury bond yields, we chose 6.42% as market risk premium. After identifying appropriate risk-free rates and risk premiums, we began identifying Betas for each division of Marriott (Exhibit 1). We started by selecting an appropriate proxy company for each of Marriott's three divisions. Housing was the first division we looked at. The La Quinta Motor Inns seem to be the best pure-play. La Quinta's business consisted solely of lodging. It owns, operates and licenses motor hotels that fit well with Marriott's operations in the hotel division. To calculate the betas of this split, we had to find the cost of debt. The cost of debt we used came from interest rates on long-term 30-year government bonds plus the debt rate premium because Marriot's real estate assets had a long-term useful life. After calculating the cost of debt for the lumber division, we calculated the division's debt beta which came out to be 1.0233. Finally, we used the debt beta to find the division's asset beta which came to 0.737. The Restaurant Division was the next division we analyzed.