Marriott Corporation

In: Business and Management

Submitted By vsch4045
Words 1398
Pages 6
Corporate Financial Management
BA 7020 – Section 200 Fall 2012

Marriot Corporation

[pic]

Group 9
Timothy Muer
Adnan Qureshi
Valerie Schmidt
Joshua Swartz
December 16th, 2012

December 16th, 2012

Dan Cohrs
Marriot Corporation
Vice President of Project Finance

RE: Marriott Corporation Consultant Summary

Dear Mr. Cohrs,

We are pleased to offer our consulting opinion in regards to the cost of capital, debt, and equity. We have reviewed and analyzed the industry and market data provided as well as heavily researched your industry to understand trends, risks, growth potential, etc.

The attached report is a detailed summary of problems and decisions faced based on the method of calculating the cost of capital, cost of equity, and the cost of debt. We have focused our efforts to specifically outline the correct risk free rate, risk premium, hurdle rate, and beta to be used in those calculations. In addition to analysis of the problems, we have also outlined recommendations for the future. These recommendations include a 8.72% risk free rate, 7.92% risk premium, and 1.135 beta for the Marriot Corporate as a whole as well as individual risk free rate, risk premium, and beta for each division.

Additional in depth analysis is provided within the report. Also included are detailed explanations for the recommendations referenced above.

We look forward to witnessing your continued growth and wish you success in the future!

Sincerely,

Group 9

Problem Statement

Marriott Corporation operates three major lines of business that include lodging, contract services, and restaurants. In order to implement the corporate financial strategy, Marriott needs to calculate and understand where each division currently stands in regards to cost of capital, cost of equity, and cost of debt. Risk free rates, risk premiums, and…...

Similar Documents

Marriott Corporation Case Analysis

...Dan Cohrs, vice president of finance at the Marriott Corporation has to prepare his annual recommendations for the hurdle rates for the firm’s three major lines of business – lodging, contract services and restaurants. He recognizes that the hurdle rates are going to have a significant impact on the firm’s financial and operational strategies. If hurdle rates increased, Marriott’s growth would be reduced as once profitable projects wouldn’t remain so. While on the other hand, decease in hurdle rates would accelerate the firm’s growth trajectory. So it is very important for Dan to make appropriate recommendations for the divisional hurdle rates as this could influence project investment decisions to a great extent. When determining the appropriate discount rate for a project, firm should understand that what investors care about is if the project earns a higher return than it could earn elsewhere on an investment with similar risk level. The appropriate beta  should be considered for a particular project and not of the entire firm because different projects in a firm can have different betas as they represent different levels of investment with different risks. Once you have the project you can use the CAPM equation to calculate the cost of equity rE as: rE = rf + *(rm - rf) where rf – risk free rate and (rm - rf) – risk premium Once cost of equity is calculated, weighted average cost of capital can be calculated as below: WACC = (1-T)*(D/D+E)*rD + rE * (D/D+E) where...

Words: 753 - Pages: 4

Marriott Corporation: the Cost of Capital

...1) What is the WACC for Marriott Corporation? What type of investments would you value using Marriott’s WACC? (Note: the WACC formula is on page 398 of the textbook. You might want to answer these questions on your way to WACC: a. What risk-free rate and risk premium did you use to calculate the cost of equity? The risk free rate used was a weighted average of the short-term treasury bills and long-term bond rates found in Exhibit 4. Using a weighted average based off the amount of revenue for each of the three divisions, long-term bond rate of 4.58% was used for the lodging, while the short-term Treasury bill rate of 3.54% was used for the contract services and restaurants. For the risk premium, a similar approach was used, using a weighted average from the spread rates found in Exhibit 5. The risk-free rate ended up with a blended average of 3.97% and a risk premium of 8.04%. b. How did you measure Marriott’s cost of debt? After calculating the risk-free rate and premium for Marriott as a whole, the beta of 1.11 found in exhibit 3 was used to calculate the cost of equity, which was calculated to be 12.89%. The cost of debt was then calculated by determining the proper government rate and debt rate premium. For the government rate, a weighted blended average was again used. The 30-year government interest rate was used for the lodging division, while an estimate of 7.5% (rate in between the 1-year and 10-year rate) was used for the contract services and......

Words: 401 - Pages: 2

Marriott

...Case Questions Case #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 for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? 5. What is the cost of capital for the lodging and restaurant divisions of Marriott? a. What risk free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? b. How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? c. How did you measure the beta of each division? Case Hints and Suggestions The primary objective of this case is to show students how the CAPM is used to compute the cost of capital. Students learn to calculate beta based on comparable companies and to lever betas to adjust for capital structure. Students are asked to determine the appropriate risk-less rate and market risk premium. This case also encourages students to focus on the choice of time period to estimate expected returns and the difference......

Words: 3319 - Pages: 14

Feldt V. Marriott Corporation

...Feldt v. Marriott Corporation 322 A.2d 913 (D.C. 1974) ​According to the case study titled “Feldt v. Marriott Corporation,” the appellant entered the appellee’s restaurant barefoot but was not asked to leave until after purchasing and receiving her food. The appellee asked the appellant to leave several times but she refused to leave the facility until she had finished her meal. After several refusals and one inappropriate comment made by the appellant, the appellee asked a police officer to escort the troubled woman off the premises. While guiding her towards the exit, the appellant struck the police officer, therefore, causing more ruckus. Upon being arrested and spending one night in the Women’s Detention Center, the appellant was released on her personal recognizance and ordered to court the following day, where she was free to leave after being dropped of any charges. ​The study provides a great expectation of what happens on a regular basis in the hospitality industry. Because customers are always “guests” and help make the industry thrive, they often feel as though they can do whatever they would like—simply because they paid for a facility’s services. Although we are taught by our employers, fellow employees, and professors that “the customer is always right,” that is not always the case. The appellate in “Feldt v. Marriott Corporation” may have been freed from any charges but she was certainly not innocent, nor was the appellee. ​While the appellant proved...

Words: 651 - Pages: 3

Darden Case - Marriott Corporation Strategy

...In January 1980, the management of the Marriott Corporation found itself in an interesting dilemma: not only did the corporation have considerable excess debt capacity, but projections of future operations and cash flows indicated that this capacity was on the rise. For Marriott, excess debt capacity was viewed as comparable to unused plant capacity because the existing equity base could support additional productive assets. Management was therefore faced with two problems. First, it needed to determine the amount of funds that would be available if Marriott's full debt capacity were utilized. Second, management needed to decide whether to invest excess funds in new or existing businesses, or to return them to the companies shareholders by paying higher cash dividends or repurchasing stock. To resolve the first issue, it is recommended that the Marriott corporation calculates several coverage ratios so that it can evaluate it's ability to cover the costs associated with varying levels of debt. There are three coverage ratios, corresponding to the costs associated with increased debt leverage, recommended by Higgins n his book. These ratios are times interest covered, times burden covered, and times common covered. To calculate these ratios EBIT is divided by a specific cost, or sum of costs, to determine how well profits are able to support them. Alternatively, “percentage EBIT can fall” could be calculated with regards to each type of cost, to determine the percentage......

Words: 616 - Pages: 3

Marriott

...after them dropping below investment grades, that’s their own rule/policy, which should not have any impacts on Marriott management team’s decision making. The transaction is consistent with management responsibilities. Because: First, the Chariot project give MII opportunity to invest in more profitable opportunities, since it can maintain investment grade without old debt burden and could access the capital market by borrowing with lower cost. Second, this Chariot transaction gives shareholders a better opportunity to benefit from the firm’s upside potential. In brief, although in short term shareholders may suffer a small loss due to the waste of tax credit generated from HMC’s operating loss, the shareholders can benefit in long-term with MII’s investment in more profitable project and HMC’s properties value appreciation. Third, if management doesn’t do this Chariot transaction, the entire Marriott may enter a “vicious cycle”, i.e., the firm stuck in the not great situation of low profits and prohibition from accessing the capital market, and the stock price may further go down. 4. In your opinion, should Mr. Marriott recommend this project to the board? Be prepared to defend you opinion on class. Our group suggest Mr. Marriott recommend this project to the board, mainly on two major reasons. First, by splitting current Marriott Corporation into MII and HMC, they are able to focus on each of their core business competencies. For MII, without the......

Words: 895 - Pages: 4

Marriott Corporation, Case Study Solution

...HEC Lausanne Corporate Finance Case 3: Marriott Corporation (A) Spring Semester 1. Project Chariot is proposed by MC’s CFO, Stephen Bollenbach, to face the troubles that Marriott Corporation (MC) is currently facing. A glimpse of history is useful to understand the current situation. MC’s main business is to develop hotel properties, to sell them to outside investors and to conclude long-term contracts. In the 70’s MC began to finance its expansion by major borrowings under the impulsion of the new president J.W Marriott, Jr. that abandoned the conservative financing policy of its predecessor (and father). In 1981 the Economy Recovery Tax Act (ERTA) gave enormous incentives for companies to invest (tax write-offs were given for each $ invested in real estate). This pushed MC to develop even more its activities for instance in lodging services or in full service compact hotel. Even though ERTA was ended in 1986 MC continued its massive investments, which lead to a significant accumulation of debt. This was not an issue since the revenue growth was able to sustain the also growing interest payments. Until the drop of income in 1989, which froze capital expenditures. Unfortunately for MC, it was followed by the real estate collapse in 1990 that left MC with massive interest payments for properties that no one wanted to buy anymore given the current economic environment. This situation results in an extremely limited ability for MC to raise funds in the capital......

Words: 2709 - Pages: 11

Marriott Corporation

...Harvard Business School 9-298-101 Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987, Marriott's sales grew by 24% and its return on equity stood at 22%. Sales and earnings per share had doubled over the previous four years, and the operating strategy was aimed at continuing this trend. Marriott's 1987 annual report stated: We intend to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas our goal is to be the preferred employer, the preferred provider, and the most profitable company. Mr. Cohrs recognized that the divisional hurdle rates at Marriott would have a significant effect on the firm's financial and operating strategies. As a rule of thumb, increasing the hurdle rate by 1% (for example, from 12% to 12.12%), decreases the present value of project inflows by 1%. Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects . Figure A shows the substantial effect of hurdle rates on the anticipated......

Words: 4151 - Pages: 17

Hbs Marriott Corporation

...9-282-042 Rev. September 15, 1986 Marriott Corporation The idea of repurchasing shares was no stranger to Bill Marriott by January 1980. Almost five million shares of common stock had been repurchased on the open market by Marriott Corporation during 1979 at a total cost of $74 million and an average price of $15.16 in the belief that they were undervalued—a belief that still was not fully reflected in the market price. At $19 5/8, the stock was selling at only six times cash flow per share; and its price/earnings ratio of nine was a far cry from historical multiples as high as fifty times as recently as 1973. Its low price seemed to offer once again an obvious opportunity to benefit shareholders. However, the proposal to repurchase 10 million of the 32 million still outstanding shares aroused some uneasiness. If successful, it had the potential of enhancing Marriott's EPS and of increasing family and management control from 20% to 29% of outstanding shares. However, it represented a move that was almost entirely financial—one that would run the debt well above the levels advocated before the Board of Directors only two years earlier. The repurchase would also necessitate renegotiation of restrictive covenants in existing loan agreements. Lastly, the huge size of the proposed program would require a tender price of $23 1/2, a hefty premium of $4 over the current market price. All of this seemed somewhat out of character for a corporation known for caution......

Words: 4542 - Pages: 19

Marriott

...YULIIA KRYVONOS MARKETING STRATEGY PLAN FOR MARRIOTT U.S.A. EXECUTIVE SUMMARY Marriott USA is a leader in the global lodging industry in that area. With numerous properties in USA and countless achievement awards, they are not only a wellknown but also a well-liked brand. The global financial crisis hit the hotel and lodging industry hard because of a sharp drop in business and leisure travel. Regardless of the steep drop in profitability over recent years, Marriott USA has plans to focus on driving incremental revenue by cutting costs at the property level. It also addresses opportunities Marriott USA has to further capitalize on their strengths by extending their expansion plans into the mid-level hotel segmenting the USA to take advantage of the industry’s fastest growing population and by utilizing low-cost, high-impact promotions to allow room rates to remain competitive and continuously evaluate market conditions as the world gradually climbs from this economic downturn. VISION & MISSION OF THE COMPANY The majority of the market shares is still in the United States. Marriott operates the global leading timeshare brand known as Marriott Vacation Club International. Marriott’s portfolio includes 3,420 lodging properties in 68 countries consisting of a total 595,461 rooms as of year-end 2009 and over 500 locations worldwide. The corporation operates about 1,000 of its lodging......

Words: 1787 - Pages: 8

Marriott Corporation: the Cost of Capital

...Harvard Business School 9-298-101 Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987, Marriott's sales grew by 24% and its return on equity stood at 22%. Sales and earnings per share had doubled over the previous four years, and the operating strategy was aimed at continuing this trend. Marriott's 1987 annual report stated: We intend to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas our goal is to be the preferred employer, the preferred provider, and the most profitable company. Mr. Cohrs recognized that the divisional hurdle rates at Marriott would have a significant effect on the firm's financial and operating strategies. As a rule of thumb, increasing the hurdle rate by 1% (for example, from 12% to 12.12%), decreases the present value of project inflows by 1%. Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects . Figure A shows the substantial effect of hurdle rates on......

Words: 4504 - Pages: 19

Marriott Corporation Cost of Capital

...Harvard Business School 9-298-101 rP os t Rev. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm's three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. op yo In 1987, Marriott's sales grew by 24% and its return on equity stood at 22%. Sales and earnings per share had doubled over the previous four years, and the operating strategy was aimed at continuing this trend. Marriott's 1987 annual report stated: We intend to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. In each of these areas our goal is to be the preferred employer, the preferred provider, and the most profitable company. tC Mr. Cohrs recognized that the divisional hurdle rates at Marriott would have a significant effect on the firm's financial and operating strategies. As a rule of thumb, increasing the hurdle rate by 1% (for example, from 12% to 12.12%), decreases the present value of project inflows by 1%. Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects . Figure A shows the......

Words: 4555 - Pages: 19

Marriott

...Introduction The goal of this research paper is to recognize and apply the principles of the marketing planning process, develop contemporary marketing management issues by analysing if the marketing mix of the organisation in this case Marriott Corporation with their Birmingham represented hotel Forest of Arden, A Marriott hotel and Country Club, satisfies their target market’s needs. Threats and opportunities will be detailed from caring a PEST analysis and by recommending marketing mix changes in line with the target markets needs and wants. Target market and marketing mix Marriott’s target marketing strategies have been enhanced in its several categories of segmentation through the various brands. The different flagships of Marriott’s brands support the overall target segmentation by the hotel. The various facilities like Marriott’s Hotels and Resorts, Courtyard by Marriott, Renaissance Hotels, Fairfield Inn and several others form the core brands that serve customer needs in the various target market segments according to Marriott.com. Being part of the brand Marriott’s Hotels and Resorts the Forest of Arden focuses on business, leisure or group events. Location can be a way to target a certain market; this hotel is located just 4 miles from Birmingham Airport and International train station within easy access of the M6/M42 and M40 so a great part of their target market is represented by business customers Considering the close proximity to the NEC, UK's largest...

Words: 2596 - Pages: 11

Marriott Corporation

...Marriot case Analysis Lodging Division 1) Finding beta for Lodging: The nearest business that could be considered for calculating the beta is the Holiday Inn Corporation which has a beta of 1.35. In order to unlevered the beta of Holiday Inn Corp using; 1.35/(1+(1-t)*D/E); where t is the tax rate; D/E is debt to equity ratio. Therefore; 1.35/(1+0.56(0.74/0.26)) The unlevered Beta for Lodging is 0.435 which is approx. to 0.44. We can use the Holiday Inn Corp’s unlevered beta as an estimate for Lodging business unlevered beta. Therefore; levered beta of lodging will be, 0.44 (1+(1-t)D/E) =0.44(1+ 0.56(0.74/0.26)) =1.128 2) Finding cost of debt for lodging business; = long term government bond + risk premium =8.95 % + 1.10 % = 10.05% 3) Finding cost of equity of the lodging division; Re=Rf + (Rpm)*beta =8.95% + (7.43%) * 1.128 = 17.33% Using spread of S&P 500 and Govt. bond as the premium. 4) WACC for the lodging division; =0.74 * (10.05%) + 0.26 (17.33%) = 11.94% Restaurants Division 1) Finding beta The more comparable business in restaurants industry to the restaurants division of Marriot is Wendy’s International, where levered beta is 1.32. Converting it into unlevered beta; 1.32/(1+0.56(0.21/.79)) =1.1489 We can use the unlevered beta of Wendy’s International as our estimate of unlevered beta for the Restaurant’s division. To find the levered restaurants division beta; 1.1489 (1+0.56(.42/.58)) =1.61 ......

Words: 1077 - Pages: 5

Marriott

...answer the questions revolving around the Project Chariot, the Spin-off that allowed Marriott to separate its business activities in its world famous hotel management business and a separate real estate business in 1994. This project involves the splitting up the company into two separate entities, Marriott International Incorporated (MI) and Host Marriott Corporation (HM) in order to minimize the debt burden and improve the financial health of the company after severe effects from real estate market crash and the slowdown in the business in early nineties. The description of Marriott Corporation, key issues faced by the corporation, details about the proposed Project Chariot and the alternatives and consequences of implementing Project Chariot is reported in the following sections. 1) The first analysis is the impact assessment for the parties and stakeholders of Marriott: According to the reorganization plan MI would operate hotels and include Marriott’s service businesses. It would also own Marriott’s trademarks, trade names, reservation and franchise systems. HM would own Marriott’s hotel properties and undeveloped real estate. It would also operate food, beverage, and merchandise concession in airports and toll-road rest areas. Impact Assessment for: a) Shareholders: the project would give each shareholder one share of the new Marriott International Inc. (MI) for each share of Marriott, so since no cash would be exchanged/transferred. It would have the beneficial......

Words: 1098 - Pages: 5

Running Man Episode 165 | Pony's Beauty Diary | Colecciones de Advanced Password Recovey.