#5 – Marriott Corporation: The Cost of Capital 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? 2. How does Marriott use its estimate of its cost of capital? Does this make sense? 3. What is the weighted average cost of capital for Marriott Corporation? a. What risk free rate and risk premium did you use to calculate the cost of equity? b. How did you measure Marriott’s cost of debt? 4. If Marriott used a single corporate hurdle rate
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with its growth objective? Explain. • Manage Rather than own hotel assets – Marriott sold it’s assets to partners, which should increase profitability by way of return on assets. Although there is a risk of contract expiration, but investing in higher risk projects should result in high returns. • Invest in projects that increase shareholder Value – The discounted cash flows method allows for Marriott to invest in projects that are profitable, although I would argue that company faces
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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? ..................................
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Nov. 25th, 2014 Marriott Case 1) Marriott Corporation is trying to determine the proper WACC it which to value it’s projects in the near future. A problem exists because the market (especially the bond market) has been quite volatile, which affects the risk free rate. The risk free rate is the foundation of CAPM, which will be needed to determine the WACC. 2) The problems arise because the four key elements of Marriott’s financial strategy are managing hotel assets rather than owning, investing
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quality. Invest in projects that increase shareholder value: Marriott is focused on project, which will give a potential return. To invest in projects that increase shareholder value is good for growth. Marriott is able to analyze potential investments. Optimize the use of debt in the capital structure: They invest money in long-term assets so they have to optimize their debt use. Decreasing the debt percentage the value of Marriott will increase. Repurchase undervalued shares: The strategy to
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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
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Marriott Corporation - The Cost of Capital (Abridged) The Marriott Corporation is comprised of three major lines of businesses, lodging, restaurants and contract services. In order to decide which projects to take on in these divisions, each year a hurdle rate must be set which they use to discount a project’s cash flow to see if it will be profitable enough. We will conduct an analysis to calculate the hurdle rate for Marriott as a whole and for each division. We will use WACC as the hurdle rate
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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
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Assignment Source Document: HBS case- Marriott Corporation: cost of capital Prepare a case discussion report. The report must at least address the following issues 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? Marriot has following four financial strategy components * Manage rather than own hotel assets. * Invest in projects that increase shareholders values * Optimize the use of debt in the capital structure * Repurchased
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UCLA Law School Prof. Mark Garmaise Spring 2016 Law 447 – Memo #1 Marriott Corporation Memo (required): The Marriott case will be discussed in class on Mar. 2. Prepare, in groups of no more than three students, a 2-page memo answering the questions below. The memo is to be submitted to the records office by 12 noon on Mar. 2. Groups should submit only one memo. Please retain a copy of your memo for purposes of class discussion. The following are some further guidelines: 1. The
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