...| Marriott Corporation | Case Study – Write Up | Hitesh Gupta & Swapnil Deshpande 2-5-2015 | Q1 what is overall WACC for Marriott Corporation? Ans :- For calculating WACC we need cost of equity for the firm(ke) ,cost of debt(kd) capital structure of the firm and tax rate (t). To calculate cost of debt we chose the long term interest rate on U.S. government bond and added debt rate premium (From Table A debt premium = 1.3%) for Marriott Corporation to it. We chose long term US govt bond rate (Rf = 8.95%) majorly because of their lodging business which contributes more than 50% of the profit and has assets of a very long useful lives The target capital structure is provided in Table A of the case study which is 60% debt and 40% equity. We will use the same while calculating WACC. From exhibit 1 of case study the Tax rate in the year 1987 for unlevered beta = 44% = (Income tax / Income before income tax)*100% To Calculate cost of equity we have followed the below process (See Appendix for calculations): 1) Calculated unlevered beta (βu) using the given debt to equity ratio and given equity beta from Exhibit 3 of case study βu= βl(1+1-t*DE) 2) Levered the βu with the targeted capital structure and tax rate = 35% βl = βu*(1+1-t*DE) 3) To determine the risk premium (Rm – Rf) we have used 1926 -87 Spread between S&P 500 composite return and long term U.S. govt bond return (Exhibit 5 of the case study) to have a reasonable measure of long...
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...Case Study: Marriott Corporation The Cost of Capital Teresa Cortez Keith Gemmell Brandon Papsidero Robin Reschke October 28, 2013 Table of Contents 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? ...................................................................................................................... 1 2. How does Marriott use its estimate of its cost of capital? Does this make sense? ...... 3 3. What is the weighted average cost of capital for Marriott Corporation? ..................... 4 4. What type of investments would you value using Marriott’s WACC? ........................ 6 5. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7 6. What is the cost of capital for the lodging and restaurant divisions of Marriott? ........ 8 7. What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without publicly traded comparable companies? ................ 11 APPENDIX I – Math Utilized to Derive WACC for Marriott .......................................... 13...
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...| Case Study Marriott Corporation | | | | | | 08. April 2014 Table of Contents 1 Are the four components of Marriot`s financial strategy consistent with its growth objective? 1 2 How does Marriott use its estimate of its cost of capital? Does it make sense? 3 3 What is the WACC for Marriott Corporation? 3 3.1 Risk free rate? Market risk premium? 3 3.2 Cost of debt? 4 4 What type of investments would you value using Marriott´s WACC? 6 5 If Marriott used a single corporate hurdle rate for evaluating investment in each of its lines of business, what would happen to the company over time? 7 6 What is the cost of capital for the lodging and restaurants divisions of Marriott? 8 6.1 What risky free rate and risk premium did you use in calculating the cost of equity in each division? 8 6.2 How did you measure the cost of debt for each division? Should the debt cost differ across divisions? 8 6.3 How did you measure the Beta of each division? 9 7 What is the cost of capital for Marriott´s contract service division? How can you estimate its equity costs without publicly traded comparable firms? 11 8 Bibliography 13 Are the four components of Marriot`s financial strategy consistent with its growth objective? Marriott Corporation is an international company whose sales in 1987 grew by 24% and its return on equity was at 22%.The three lines of business are lodging, contract services and restaurants. The main goal consists of developing and...
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...Marriott's corporation: the cost of capital What is the weighted average cost of capital for Marriott Corporation? Are the four components of Marriott's financial strategy consistent with its growth objective? Marriott Corporation is an international company who's the growth over the year has been more than satisfactory. In 1987, Marriott's sales grew up by 24% and its return on equity stood at 22%. Moreover the sales and earnings pr share has doubled over the previous year. The company operates in three divisions: lodging, contract services and restaurants which represents 41%, 46% and 13% of sales in 1987 respectively. Marriott is determined to develop and to enhance its position in each division. This main goal contains 3 others more detailed components: - To become the most profitable company. - To be the preferred employer. - To be the preferred provider. In order to achieve its goal, the managers of Marriott have developed a financial strategy with 4 main decisions. Manage rather than own hotel assets. The first measure is simply to be more involved in the management of theirs hotel. It means for the company to have more control on how the money is used but also to have more responsibilities concerning the employees and especially the customers. The company is able to monitor and control its resources and expenses. By having more control, Marriott can try to improve its efficiency and its profitability, for example, by searching the best...
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...shareholder value, to optimize the use of debt in the capital structure, and to repurchase undervalued shares when necessary. Marriott’s growth objective is to become the preferred employer and provider in lodging, contract services (such as catering), and restaurants, and to be the most profitable company in their industry. By choosing to manage hotel properties instead of owning them Marriott lowers their accounting assets on the books, therefore increasing their return on assets as compared to owning the properties outright. This strategy also effectively shares the risk that comes from the properties, and lets Marriott operate with more liquidity, offering them the opportunity to relocate their hotel or restaurant operations without the need to sell properties, for instance. Marriott can analyze potential projects and discount the future cash flows to determine which projects will have a higher net present value, and ultimately which will be most profitable to Marriott at the present time, therefore increasing shareholder wealth. Balance sheets reflect all company debt, so by reducing debt Marriott can decrease their Debt to Equity ratio, becoming more attractive to new and existing shareholders. Marriott’s plan to repurchase shares when they are undervalued can positively affect share price and therefore shareholder value, but it is not directly in line with their project-based growth objective. By repurchasing shares, they are removing shares from the market. As they continue...
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...Marriott Case Study 1)What is the weighted average cost of capital for Marriott? The weighted average cost of capital for Marriott is 11.64%. .4(cost of equity) + .6(cost of debt)(1- tax) Tax = Income tax/Income before tax = 175.9/398.9 = 44% Cost of debt = .5(.0895) + .4(.0872) + .25(.069) + .5(.011) + .4(.014) +.25(.018) = 11.25% B = 1.1 when d/e = .41 target d/e is .6 so.. B(a) = B(e) / (1 + (1-tax) D/E) = 1.11 / (1+.56(2499/3596)) = .80 B = .8 * (1+.56(5394/3596)) = 1.47 Equity risk Prem = 7.43% (arithmetic average between 1926-1987) Cost of Equity = Rf + B(Risk Prem) = .0872 + 1.47(.0743) = 19.64% WACC = .4(.1964) + .6(.1125)(1-.44) = 11.64% i)What risk free rate and risk premium did you use to estimate the cost of equity? We used the risk free rate of a 10 year government bond (8.72%) to estimate the total risk free rate. We found the risk premium by looking at the arithmetic average between 1926-1987 of the spread between S&P 500 Composite returns and long-term U.S. government bond returns. ii)How did you estimate Marriott’s cost of debt? We estimated the cost of debt by multiplying the fraction of debt at the floating rate for each division by the long term rate (for lodging) plus the premium or the shorter term rates (for the other 2 divisions) plus the premiums. We chose to use 30 year rate for lodging since that probably lasts the longest, 10 year rate for restaurants since they probably last more than a year, and the 1 year rate for...
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...Marriott Case Study In this summary, we are going to discuss Marriott’s strategy points for maintaining its status as a premier growth company, weighted average cost of capital (WACC), divisional hurdle rates, and justification of numbers used in calculations. Marriott’s strategic plan to maintain its status as a premier growth company can be broken into four distinct areas: managing (as opposed to owning) hotel assets, choosing investments that increase shareholder value, optimizing the use of debt within the capital structure, and repurchasing undervalued shares. The choice to manage hotel assets has the benefit of freeing up capital to invest in other opportunities. This allows for more growth throughout the company. Investing in projects that increase shareholder value through the use of a discounted cash flow technique also enhances growth opportunities. Optimizing the debt portion of their capital structure allows them to focus on the ability to service their debt, instead of targeting a debt to equity ratio. This ensures that their capital is efficiently utilized. The final financial strategy to discuss here is Marriott’s repurchasing of undervalued shares. This allows for more retained earnings, which again speaks to their efforts to efficiently utilize capital. All four of these strategic decisions ensure that capital is efficiently utilized towards growth, which is clearly in line with the company’s goal of remaining a premier growth company. Marriott uses the weighted...
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...Instructor Guide CORPORATE FINANCE COURSE NUMBER: MBA591 [pic] Jones International University®, Ltd. 1.800.811.JONES (5663) http://www.jonesinternational.edu ©2008 Jones International University®, Ltd. All rights reserved. 9697 East Mineral Avenue, Englewood, Colorado 80112, USA This workbook and all accompanying audio-visual material, manuals and software (collectively, the "Materials") are copyrighted with all rights reserved. Under the copyright laws, none of the Materials may be copied in whole or in part without prior written consent of Jones International University®, Ltd. (JIU™) You may permanently transfer all of your rights in the Materials, provided that you retain no copies, and provided that you transfer all of the Materials (including all component parts, media, documentation and any prior versions and upgrades). You may not copy or allow any copies of the Materials to be made for others, whether or not you charge anyone else for the copies. Limitation of Liability. JIU™ PROVIDES ALL OF THE MATERIALS “AS IS” WITHOUT WARRANTY OF ANY KIND. EACH OF JIU AND ALL ITS DEVELOPERS, TEACHING FACULTY, DIRECTORS, OFFICERS, EMPLOYEES OR AFFILIATES DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL JIU OR ITS DEVELOPERS, TEACHING...
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...Jacque Final Review Guide 1) Operating Leverage vs. financial leverage: Laurence A high degree of Operating Leverage means that a relatively low change in sales will result in large change in EBIT. If all things are held constant, the higher the firm’s fixed cost the greater its Operating Leverage. In Jacque’s words, this has to do with volatility of the top line. Those firms are usually highly automated, capital intensive, hire highly skilled individuals (read pay them huge salaries), and engage into costly R&D activities. Effects of Operating Leverage on Business Risk: (if all other things held constant) the higher a firm’s Operating Leverage, the higher its business risk. This is because in lower economical cycles, the firm will still be incurring its fixed cost. However, remember that higher risk usually commands for a higher return on investment. Financial leverage is the use of debt to finance the activities of a business. Financial risk is the additional risk put on the shareholder when management decides to finance with debt. The more debt a firm takes on, the more concentrated the business risk on the shareholder because the shareholder is a residual claimant. This results in a higher expected rate of return on the investment by the shareholder. Consequences of an increase in leverage (Leverage ↑): * Expected ROE ↑ * Stockholder risk ↑ * Standard deviation ↑ * Coefficient of variation ↑ 2) Cash-Flow statement and valuation: Natalia ...
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...048763 Published by Vivek Mehra for Response Books, typeset in 9.5/13 pt Berthold Baskerville by Star Compugraphics Private Limited, Delhi and printed at Chaman Enterprises, New Delhi. Library of Congress Cataloging-in-Publication Data Mergers, acquisitions and corporate restructuring/edited by Chandrashekar Krishnamurti, Vishwanath S.R. p. cm. Includes references and index. 1. Consolidation and merger of corporations. Corporate reorganizations. I. Vishwanath, S.R., 1971– II. Krishnamurti, Chandrashekar, 1956– HG4028.M4 .M44 658.1/6 22 2008 2007041465 ISBN: 978-0-7619-3586-5 (Pb) 978-81-7829-747-7 (India–Pb) The SAGE Team: Sugata Ghosh, Meena Chakravorty and Anju Saxena Contents List of Exhibits List of Tables List of Figures Case Map Preface 1. Diversification via Acquisition K. Sankaran and Vishwanath S.R. Why are Takeovers Needed? Traditional View of Diversification Synergy: The Key to Improved Performance...
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...CHAPTER 2 Present Values, The Objectives of the Firm, and Corporate Governance Answers to Practice Questions 1. The face value of the treasury security is $1,000. If this security earns 5%, then in one year we will receive $1,050. Thus: NPV = C0 + [C1/(1 + r)] = −$1000 + ($1050/1.05) = 0 This is not a surprising result because 5 percent is the opportunity cost of capital, i.e., 5 percent is the return available in the capital market. If any investment earns a rate of return equal to the opportunity cost of capital, the NPV of that investment is zero. NPV = −$1,300,000 + ($1,500,000/1.10) = +$63,636 Since the NPV is positive, you would construct the motel. Alternatively, we can compute r as follows: r = ($1,500,000/$1,300,000) – 1 = 0.1539 = 15.39% Since the rate of return is greater than the cost of capital, you would construct the motel. 3. Investment (1) NPV Return 2. − 10,000 + 18,000 = $5,000 1.20 18,000 − 10,000 = 0.80 = 80.0% 10,000 9,000 − 5,000 = 0.80 = 80.0% 5,000 5,700 − 5,000 = 0.14 = 14.0% 5,000 4,000 − 2,000 = 1.00 = 100.0% 2,000 (2) − 5,000 + 9,000 = $2,500 1.20 5,700 = −$250 1.20 4,000 = $1,333.33 1.20 (3) − 5,000 + (4) − 2,000 + a. b. Investment 1, because it has the highest NPV. Investment 1, because it maximizes shareholders’ wealth. 1 4. a. b. NPV = (−$50,000 + $20,000) + ($38,000/1.05) = $6,190.48 NPV = (−$50,000 + $20,000) + ($38,000/1.10) = $4,545.45 In Part (a), the NPV is higher than the NPV of...
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...tly A sk ed Fr equen in s Question orporate C FinanCe io, a llocch ur izio D uiry, M a lv i Pa sc a l Q tonio Sa Le Fur , A n Ya nn From the team behind Pierre Vernimmen’s % = Corporate FinanCe + 3 Frequently Asked Questions in Corporate Finance Frequently Asked Questions in Corporate Finance Pierre Vernimmen, Pascal Quiry, Antonio Salvi, Maurizio Dallocchio and Yann LeFur A John Wiley & Sons, Ltd., Publication This edition first published in 2011 Copyright 2011 Pierre Vernimmen Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com The rights of Pierre Vernimmen, Pascal Quiry, Antonio Salvi, Maurizio Dallocchio and Yann LeFur to be identified as the authors of this work have been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with...
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...COMPANY NOTE Initiating Coverage 27 October 2014 CHN | Technology | Internet BUY Price target $118.00 Price $95.76 The Powerful E-Commerce Ecosystem Connecting Half of China; Initiate at Buy Key Takeaway China's changing Internet user demographics and mobile development support our favorable view on e-Commerce for the next decade. Alibaba is the largest Chinese ecommerce player, with 80%+ GMV market share, but is only selling to less than 25% of the population now. We estimate well over half of Chinese population will be shopping on Alibaba’s platforms in 10 years. Initiate with Buy; PT USD118. Changing demographics & mobile support ecommerce in the next decade. As discussed in our sector note, "A Taste of Domestic Consumption: The Unleashing of China's E-Commerce Power" published on Sept 19, 2014, China’s e-Commerce growth for the next decade benefit from: 1) changing Internet user demographics towards 30+ year old age groups; 2) accelerating structural shift to online from traditional retail; 3) Chinese government’s massive support for urbanization and domestic consumption; 4) proliferation of affordable smart devices; 5) improving wireless and transport infrastructures in lower tier and rural markets, and 6) rising consumer demand for better quality, design & fashion, authenticity and timely delivery. Growth driven by mix shift towards Tmall, and improving mobile monetization. We expect Alibaba, as the largest e-Commerce player, to sell to...
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...Customer Relationship Management VSF This book is dedicated to my children Emma and Lewis of whom I am enormously proud. Customer Relationship Management Concepts and Technologies Second edition Francis Buttle AMSTERDAM • BOSTON • HEIDELBERG • LONDON • NEW YORK • OXFORD PARIS • SAN DIEGO • SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Butterworth-Heinemann is an imprint of Elsevier Butterworth-Heinemann is an imprint of Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA First edition 2009 Copyright © 2009, Francis Buttle Published by Elsevier Ltd. All rights reserved. The right of Francis Buttle to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone ( 44) (0) 1865 843830; fax: ( 44) (0) 1865 853333; email: permissions@elsevier.com. Alternatively you can submit your request online by visiting the Elsevier web site at http://elsevier.com/locate/ permissions, and selecting Obtaining permission to use Elsevier material. Notice No responsibility is assumed by the publisher for any injury and/or damage...
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...Volume 10, Issue 3 Fall 2010 No Double Dip On July 5th, 6th, and very early on the 7th of this year, I engaged in 70 minutes of rigorous stationary biking, a full cycle of weightlifting, and my daily stretching regimen. Oh sure, I had some hip pain and a sore knee, but at age 59, I was rocking and rolling. In this regard, I was not unlike the U.S. economy in 2005-April 2007, which was doing great in spite of some fundamental problems. Then in the course of a few hours on July 7th, I was unable to walk more than a few steps after having a hip replaced. Just like the U.S. economy in late 2008, my infirmity had taken me down a few notches! My subsequent recovery was remarkably similar to that facing the U.S. economy: a satisfactory recovery to unremarkable mediocrity. As I describe my recovery, bear in mind that the U.S. economy shed 8.4 million jobs and 4.1% of GDP in roughly 18 months. This is a lot of economic damage. On July 8th, I was able to walk twice a day for 20 minutes, bearing weight on crutches, lifting light hand weights, and doing simple leg therapy. By July 19th, I did not need any pills or a cane, and was able to walk an hour twice a day at a 23-minute-mile pace. By August 19th, I biked at full resistance for 50 minutes, walked 15-minute-miles for an hour, actively lifted leg weights, Thru Latest Available as of Sept 20, 2010 3.0 $420.5 20.5 1.9 960.1 $418 15.8 6.3 1,458.0 723.0 -50.0 261.0 681.0 15.8 4.5 20.0 93.9 -2.3 2.4 -190.2 $305.1 -$351.9 On the...
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