...Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand, expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time, Marriott had three main lines of business, lodging, contract services and restaurants, with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning, investing in projects with the goal of increasing shareholder value, optimizing the use of debt, and repurchasing their undervalued shares. Marriott Corporation relied on measuring the opportunity cost of capital for investments by utilizing the concept of Weighted Average Cost of Capital (WACC). In April 1988, VP of project finance, Dan Cohrs suggested that the divisional hurdle rates at the company would have a key impact on their future financial and operating strategies. Marriott intended to continue its growth at a fast pace by relying on the best opportunities arising from their lodging, contract services and restaurants lines of businesses. To make the company managers more involved in its financial strategies, Marriott also considered using the hurdle rates for determining the incentive compensations. What is the weighted average cost of capital (WACC) for Marriott Corporation? WACC = (1 - τ)rD(D/V) + rE(E/V) D = market value of debt E = market value of equity V...
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...consistent with its growth objectives. Strategy one, managing rather than owning hotel assets, leads to decrease in cost. Save on the costs can be invested in more hotels and generate profits after pre-specified return. Strategy two, investing in projects that increase shareholders value with positive NPV, brings resources for future growth. Strategy three, optimizing the use of debt in the capital structure, supports the growth target, since debt is a cheaper than equity to finance the future growth. Strategy four, repurchasing undervalued shares, generates value for shareholders equivalent to positive NPV project. Q2: Ways Mariott uses its estimate of its cost of capital Marriott uses its estimate of its cost of capital to choose possible investment projects, determine incentive compensation and calculate the warranted equity value. Marriott uses different hurdle rates for different divisions to discount the future cash flow to decide which project to invest. It makes sense as projects for different divisions bear different risks. And Marriott sets different bonus awards for managers who have different responsibilities. And the awards are connected with divisional returns as well as divisional hurdle rates. This also makes sense as managers in different positions face different markets. At last, Marriott discounts the firm’s equity cash flows by its equity cost of capital, which is the hurdle rate for the equity of the whole company. It is the base to decide whether the Marriott...
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...Corporation: The Cost of Capital (Abridged) Dan Cohrs, Vice President of Marriott Corporations project finance, prepared his annual recommendations for the hurdle rates. The year before, Marriott’s sales grew 24%, sales and earnings per share had doubled the last 4 years and the ROE stood at 22%. The strategy of Marriott was to remain a growth company. The goal was to be one of most preferred employer, the most profitable company and a preferred provider. The financial strategy of Marriott was about 4 criteria: 1. Manage rather than own Hotels assets 2. Invest in projects that increase shareholder value 3. Optimize the use of dept in the capital structure 4. Repurchase undervalued shares. Manage rather than own hotels assets Marriott became on of the largest commercial real estate developers in the US. Marriott sold hotels assets to limited partners but retained operating control as the general partner. 3% of revenue and 20% profit before depreciation typically equalled management fees. During 1987, 70 Courtyard hotels and 3 Marriott hotels were syndicated $890.000.000. The company operated about $7 billion worth oft he syndicated hotels in total. Invest in projects that increase shareholder value The company uses a discount cash flow technique and the hurdle rates to a specific project that was based on market interest rates, project risk and estimates of premium risk. They also used a cash flow forecast. Optimize the use of debt in the capital structure ...
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...whether a business is generating a profit or experiencing a loss. This is done by identifying all the money coming into the business, which is usually the revenue generated by day-to-day sales. Then all the money going out of the business is identified; these are all the bills that must be paid to maintain the business. To determine net profit or loss, the business owner subtracts the expenses from the revenues. If this number is positive—meaning, the revenues are greater than the expenses—the business is generating a profit. If the number is negative—meaning the expenses are greater than the revenues—the business is experiencing a loss. There are several parts of an income statement. These include revenue, cost of goods/services sold, gross profit, fixed operating costs, pre-tax profit, taxes, and net profit(loss). In Figure 1 below, you can see an example of a simple income statement for a company that sells name badge holders. This income statement allows you to see the business is profitable, and how profitable. The Cash Flow Statement The cash flow statement shows cash receipts less cash disbursements over a period of time, generally a month. The first section of a cash flow statement shows all sources of income for the month. The second section shows all cash disbursed by the business for that month. The last section shows the net change in cash flow. This shows the owner whether the business had a...
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...Marriott - The Cost of Capital 1/25/2012 Since Marriott and its three divisions all have debt and equity in their capital structure. The cost of capital is the same as Weighed average of cost of capital WACC. WACC = Rd x Wd x (1-T) + Re x We Cost of debt (pretax) = Rd | |Debt Rate Premium Over |Government Rate* |Pretax Cost of debt | | |Government | | | |Mariott |1.30% |8.95% |10.25% | |Lodging |1.10% |8.95% |10.05% | |Contract Services |1.40% |6.90% |8.30% | |Restaurants |1.80% |6.90% |8.70% | For each division, cost of debt is calculated by US government interest rate plus premium. For Marriott and Lodging, since they have longer useful lives, we use 30 year US government interest rate of 8.95%; for Contract service and restaurants, which have shorter useful life, we use 1 year US government interest rate of 6.9%. Tax rate From Income Statement, tax rates from 1978 to 1987 range from 37% to 47%, average of 42%...
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...portfolio is the most important strategy for Marriott. The company operates in five business segments with each segment having several brands targeting different customer bases (luxury, upper moderate, moderate and lower moderate). This gives it high brand recognition and diversified revenue resources. IT in Marriott (Real Scenario): IT solutions are a large way to bring in business and are another one of Marriott strengths. Marriott’s Automated Reservation System for Hotel Accommodations (MARSH), a technical innovation. It established a global database of all of Marriott’s customers in the world. Along with another technical innovation, Property Guest Objective Oriented System (PGOOS), an automatic price auditing tool developed to lower labor cost and...
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...Johnson & Wales University ScholarsArchive@JWU MBA Student Scholarship The Alan Shawn Feinstein Graduate School 2-9-2012 Analysis of the Real Estate Investment Trust (REIT) Industry Frederic Juillet Johnson & Wales University - Providence, fredjuillet@gmail.com Follow this and additional works at: http://scholarsarchive.jwu.edu/mba_student Part of the Accounting Commons, Business Administration, Management, and Operations Commons, Business and Corporate Communications Commons, Finance and Financial Management Commons, Marketing Commons, Real Estate Commons, and the Strategic Management Policy Commons Repository Citation Juillet, Frederic, "Analysis of the Real Estate Investment Trust (REIT) Industry" (2012). MBA Student Scholarship. Paper 6. http://scholarsarchive.jwu.edu/mba_student/6 This Research Paper is brought to you for free and open access by the The Alan Shawn Feinstein Graduate School at ScholarsArchive@JWU. It has been accepted for inclusion in MBA Student Scholarship by an authorized administrator of ScholarsArchive@JWU. For more information, please contact egearing@jwu.edu. G Feinstein Graduate School Analysis of the Real Estate Investment Trust (REIT) Industry An industry Analysis Submitted in Partial Fulfillment of the Requirements for the MBA Degree Course: MGMT 6800 Instructor, Gary Gray Ph.D Faculty Advisor, Martin Sivula, Ph.D. Frédéric Juillet February 9, 2012 INDUSTRY ANALYSIS Executive Summary In 2009, most REITs...
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