...Marriott Case i. What is the cost of capital for Marriott Corporation as a whole? | βE | D/D+E | E/D+E | βA | Marriot Whole | 0.97 | 41% | 59% | 0.57 | Target | 1.43 | 60% | 40% | 0.57 | rA=8.95+0.57*7.43=13.20% ii. What types of investments would you value using Marriott’s WACC? Since most projects have their own idiosyncratic risks and various leverage levels, their discount rates are mostly different than the WACC of the company as a whole. Only for projects that have the same risk and the same leverage as the firm overall can we apply the Marriott’s WACC. iii. If Marriott used a single corporation hurdle rate for evaluating investment opportunities in each of its lines of businesses, what would happen to the company over time? By using the same hurdle rate, the company may implement investments that they should not, or they may not implement ones that they should because of using the improper rate to calculate NPVs of the project. When the single corporation hurdle rate (13.2%) is applied to each of its lines of businesses, some projects that are supposed to have negative NPV will be invested while other projects that are supposed to have positive NPV will be neglected. For example, the lodging sector has a discount rate of 11.97%, and by applying the corporation hurdle rate of 13.2%, the company will mistakenly pass some lodging projects that can generate positive NPV. iv. What is the cost of capital for Marriott’s three divisions? ■Lodging ...
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...MarriotMarriott Corporation: The Cost of Capital T c=income taxes of 1987 / income before income taxes of 1987 = 175.9/398.9 = 44% Step 1:From the Exhibit 3 ß equity for each firm in this industry are below Marriot Corporation 1.11; Hilton Hotels Corporation .76 ; Holiday Corporation 1.35 La Quinta Motor Inns .89; Ramada Inns, Inc 1.36. Step 2: For each firm in the industry, to estimate unlevered using the equity estimate: equity = [1 + (1-TC)Debt/Equity]unlevered unlevered of Marriot= 1.11/[1+(1-.44)*.41]=.90 unlevered of Hilton= 0.76/[1+(1-.44)*.14]=.70 unlevered of Holiday= 1.35/[1+(1-.44)*.79]=.94 unlevered of La Quinta= 0.89/[1+(1-.44)*.69]=.64 unlevered of Ramada= 1.36/[1+(1-.44)*.65]=.997 Step 3: Take an industry average of the unlevered estimates as estimate of firms unlevered (.90 +.70+.94+.64+.997)/5 = .84 Step 4: Use firm’s target D/E ratio and unlevered estimate to calculate equity equity = [1 + (1-TC)Debt/Equity]unlevered equity = [1 + (1-.44)*.41]*.84= 1.03 Step 5: Calculate the R equity using CAPM The risk free rate was 4.58%, and the equity risk premium was 7.43% for average from 1926-87 R equity =r f + ß(r premium) = 4.58%+1.03*7.43%= 12.23% Step 6: Calculate [Debt/(Debt + Equity)] and [Equity/(Debt + Equity)] V=D+E D/V=.41 E/V=1-D/V=1-.41= .59 Step 7:Use formula above to calculate r WACC r debt= r f + r debt premium = 8.72%+1.10% = 9.82% WACC=rdebt*(1-Tc)(D/V)+requity*(E/V)=9.82%*(1-0.44)*.41+12.23%*0.59 =...
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...Marriott 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...
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...How Marriott Never Forgets a Guest When retiree Ben B. Ussery Jr. goes on vacation, he typically spends hours beforehand nailing down golf dates, scouting shops for his wife, and making restaurant reservations. But last year, when the Usserys and another Richmond (Va.) couple chose to spend a week at Marriott's Desert Springs resort in Palm Desert, Calif., he let the hotel do the legwork. Weeks in advance, Marriott planning coordinator Jennifer Rodas called Ussery to ask what he wanted to do. When all was set, she faxed him an itinerary. She had even ordered flowers for his wife. ''Marriott made it a real smooth experience,'' says Ussery. ''I'm ready to go back.'' What makes such velvet-glove treatment possible is Marriott International Inc.'s (MAR) use of customer management software from Siebel Systems Inc. (SEBL) The hotel chain, based in Bethesda, Md., is counting on such technology to gain an edge with guests, event planners, and hotel owners. The software lets Marriott pull together information about its customers from different departments, so that its reps can anticipate and respond more quickly to their needs. It starts with reservations. Says Chairman J.W. Marriott Jr.: ''It's a big competitive advantage to be able to greet a customer with: 'Mr. Jones, welcome back to Marriott. We know you like a king-size bed. We know you need a rental car.''' Marriott, America's No. 1 hotel chain, is the industry leader in using technology to pamper customers. The company...
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...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 market...
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...Analysis of Marriott Corporation’s ‘Project Chariot’ Introduction In the spring of 1992, J.W. Marriott Jr., Marriott Corporation’s Chairman and CEO, must decide whether to recommend a proposal to the Board of Directors for a complete restructuring of the firm due to financial distress and a hefty current debt burden. While restructuring seems promising to executives, there are serious ethical considerations at hand regarding the fiduciary duty of management to both shareholders and debtholders. In theory, Project Chariot is a leveraged buyout that would diminish the value of Marriott’s current debt and distribute it to existing shareholders who may realize capital gains from stock appreciation. Our analysts hypothesize that CFO Stephen Bollenbach’s proposal, Project Chariot, will ultimately satisfy its outstanding debt payments to creditors in the long term despite an imminent credit downgrade, and more than anything leave shareholders extremely pleased. Project Chariot: A Brief Overview Stephen Bollenbach is proposing Project Chariot in an effort to combat the problems causing Marriott Corporation (MC) severe financial distress. The most immediate problem to fix is MC’s debt issue. Economic downturns in the 80s and the 1990 crash of the real estate market have left MC with debt issues that have weighed heavily on the company. Once the debt issues are resolved, Marriott Corporation will be able to raise capital. The new company will have the ability to take advantage...
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...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 amount...
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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 in projects with the goal of increasing shareholder value, optimizing the use of debt, and repurchasing their undervalued shares. All of these elements need accurate numbers to be effective. 3) The management understands that the WACC can be inaccurate due to the recent volatile market and needs to reassess how they will determine the WACC. 4) Management is considering using a single WACC to determine if projects are a good idea or not, regardless of which division the project is in. Furthermore, they are looking to tie in the hurdle rate for incentive compensations for management. 5) This solution is not a good idea because each division is subject to different risks and costs of capital. Therefore, using a single WACC can incorrectly choose whether a project was a good idea or not. In addition, management can be over or underpaid based off how far the “Marriott WACC” is from the “Division WACC”. 6) I would determine the WACC for each individual division and...
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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. The results of our analysis show that Marriott’s WACC as a whole is 11,61 %. For lodging, 10,04% and for restaurants 13,03%. These should be the hurdle rates to use when valuating projects. The reason that these values differ is the difference in risk premiums and expected projects, and therefore financing and project lifetimes. We estimated a shorter project lifespan for restaurants than for lodging, since we believe lodging is a long term investment while restaurants and contract services are short term investments. The Marriott Corporation uses its estimate of the cost of capital to select investment projects which would increase the shareholders value by using the appropriate hurdle rates for each division. As is stated on page 2 of the case, a key element of their financial strategy is to invest only in projects that increase shareholders value. This practice makes sense as each division has a different level of risk associated with it and hence the cash flows involved should be...
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...1. The case provides a formula for the weighted average cost of capital (WACC) that differs slightly from the formula given in class. For the purpose of your analysis, use the version of the formula given in class: We will discuss the version of the WACC given in the case later in the course. 2. In answering the questions below, pay careful attention to the distinction between Marriott’s current capital structure and its target capital structure. Please answer the following questions in your write-up: 1. What is the WACC for the Marriott Corporation? Use the data in the case to estimate the risk free rate and market risk premium. 2. What would be the result if Marriott used the same single corporate hurdle rate to evaluate investment opportunities in all of its lines of business? 3. What discount rate should be applied to Marriott’s lodging projects? What discount rate should be applied to Marriott’s restaurant projects? 4. What is the cost of capital for Marriott’s contract services division? Note that there is no publicly traded comparable company. (Hint: consider the analysis you undertook in the first problem of this homework.) 5. Suppose Marriott spun off its lodging business as a completely separate firm (with the target capital structure described in Table A). What would be the expected return on the equity of the separate lodging business? Suppose Marriott spun off its restaurant business as a completely separate firm (with the target capital structure...
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...201126734 | | ------------------------------------------------- Abstract: Marriot Corporation is an American company founded in 1927. It started as a beer stand, but after 60 years of continual growth, became one of the leading lodging and food service companies in the US. In 1987 the total sales of the company reached 6,500 billion dollars. Nowadays, the corporation’s operation includes nearly 361 hotels, provides food and services management to important institutions and corporations around the world, and owns important restaurant chains like Bob’s Big Boy and Roy Rogers. The general objective of this workshop is to determine an appropriate Cost of Capital for Marriott Corporation. To do so, we have based our assesment on the information and assumptions contained in the text of Dan Cohrs “Marriott Corporation: The Cost of Capital”. As stated in the lecture, Marriot Corporation is composed of three different divisions: lodging, restaurants and contract services. So, during this workshop we calculated a different cost of capital for each one of the three divisions. To determine the Cost of Capital for each division, we based our procedure in the Capital Assets Pricing Model and then in the Weight Average Cost of Capital, taking the risk free rate as the US Government Bond, the risk premium as the difference between the rmkt(based on S&P Index) and the rf, the tax rate as the average tax rate from 1978 to 1987, and the βU as a...
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...Case 1 Marriot Corporation: The Cost of Capital The University of Hong Kong Group 5 January 29, 2016 GUO Weizuo, Aurora 3035235642 guoweizuo2014@163.com HE Fei, Vincent 3035236608 vincenthefei@gmail.com LI Yao, Steve 3035159109 liyao@connect.hku.hk LOU Chaoyue, Laura 3035236414 lauralou@hku.hk Catalog 1. Four components of Marriott’s financial strategies consistent with its growth objective ............... 1 2. The weighted average cost of capital for Marriott Corporation ...................................................... 2 (a) The risk free rate and risk premium to calculate the cost of equity. .......................................... 2 (b) Measurement of Marriott’s cost of debt .................................................................................... 2 (c) Preference and explanaton between arithmetic & geometric mean to measure rates of return . 2 3. Which type of investment you value using Marriott’s WACC. What would happen to Marriott over time if company used a single hurdle rate ........................................................................................... 3 4. The cost of capital for the lodging and restaurant divisions of Marriott ......................................... 4 a) The risk-free rate and risk premium to calculate the cost of equity for each division ................ 4 b) Measurement of the cost of debt for each division ...............................................................
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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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...BACKGROUND INFORMATION Marriott initiated a financial reform process during the mid 1970s which was very successful in bringing the company back on a solid foot by 1980. The four year plan included steps to introduce fiscal discipline and maintain certain limits on debt to capital ratio, rating and fund raising activities. Also growth in hotel management fees and cash inflows from selling stakes in low return operations generated an excess amount of cash for the firm. The firm strongly believed in investing its cashflows as it believed in the operating model and the fact that investors would gain higher returns than if dividends were paid out. This higher cash inflow led to reduced need to raise debt. Also this excess cash could be used to pay down outstanding debt (expected to be $125 million by 1883). On the other hand the firm’s equity value was rising and this led to a declining leverage ratio. The management of the company believed that its expertise was in hotel development and management and not in long term hotel ownership. The strategies they designed were based on these factors and they started producing excellent results. In 1980 the growth prospects looked great, especially when compared to its competitors. While its peer companies had stopped growing in businesses they owned and grew very selectively in those they managed without owning, the independent companies weren’t even able to obtain financing for their planned expansion. Marriott wanted to make use of their...
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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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