Are The Four Components Of Marriott's Financial Strategy Consistent With Its Growth Objective?

Marriott’s restaurant division has a very different target capital structure than the firm’s lodging division. Specifically, the restaurant division’s target capital structure is composed of 42% debt and 58% equity. The restaurants unlevered cost of equity is 14.96% and the levered cost of equity is 16.97% (See Exhibit 3 for calculations). The cost of debt is based on the 10-year treasury rate plus a risk premium of 1.80%, leading to an overall cost of debt of 10.52%. Therefore, the overall restaurant division WACC is:

The firm has decided to increase the debt finance component portion from 20% to 30% which is a good decision since the interest payments are 100% tax deductible. The appropriate capital structure would be to

The four key elements of Marriott 's financial strategy were the following: • • • •

21.Generally, investors expect that projects with high expected net present values also will be projects with

To calculate the cost of debt and equity for this project, we combined the risk-free rate with a risk premium based on the market risk premium and the riskiness of Southwest Airlines.

Investment decisions companies make today will have a direct impact on their ability to reach financial objectives. Most companies are faced with questions such as: which projects should your company invest in, which returns are needed and what risks are the company willing to take to achieve company goals?

WACC or Weighted average cost of capital is found from a common stock, preferred stock, bonds and different components of debt cost. Signs of increased risk in the market can be found if the WACC increases, which also increases the beta and the rate of return. The WACC is important to know because it gives insight to future funding expenses. If the number is high, it means that the company will have more expenses to fund new projects. If the number is low, funding new projects will be less expensive and easier to complete.

d. Any delay in receiving the projected cash inflows will cause the project to have a positive NPV

2. A company has a capital structure which consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct? a. b. c. d. The cost of equity financing is greater than the cost of debt financing. The WACC exceeds the cost of equity financing. The WACC is calculated on a before-tax basis. The

The risk-free rate recommended under the CAPM model is the yield on long-term (i.e. 10+ years) T-bills.  When choosing the T-bill term, it is important for it to closely represent the time frame used for Heinz’ required rate of return.

To analyze the key for investing in projects, Marriott Corporation has to evaluate the hurdle rate for total firm operations as well as hurdles rate of each division by calculating the cost of capital by using the Weighted Average Cost of Capital (WACC). To calculate this value, Marriott has to evaluate the market of debt and equity, pretax cost of debt, after-tax cost of equity, value of the firm and the corporate tax rate.

a) Weighting of Capital Structure: Use of book values of capital rather than the market values

The capital asset pricing model can be used to calculate the firm's cost of capital, or at least the firm's cost of equity. The cost of equity reflects the firm's cost of using equity capital to finance its operations. The use of CAPM is effective, because the beta is based on market performance of the company's stock. The market is assumed to be capable of making an accurate

Now, if this the amount that can give us a IRR of 25% with 371739 as annual return for next four years then we can easily have a subsidy of = 1000000 - 877898.8224 = 122101.1776 ~= 122101

El problema al que se ve enfrentado Marriott como empresa, si bien puede verse desde variados puntos de vista, se puede resumir en un aspecto principal y relevante. Y esto es calcular cual es el costo de capital de la empresa como un todo; además de calcularlo de manera individual para cada una de sus divisiones, ya que la Marriott las trata en sus análisis como si fuesen empresas independientes.