Marriott Case

Be Our Guest’s balance sheet shows good signs of liquidity. Current Ratios for the past four years have remained above 1 proving that the company can handle its current liabilities. The current ratios are not extremely high (19941.27, 1995- 2.17, 1996- 1.15 and 1997- 1.16), but they can cover the current liabilities. It is important to note that the company is operating on a thin line because the current assets are barely covering the current liabilities. This is particularly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in

Risk free rate is taken to be 4.69% while the market risk premium is 5.01%.

In 1999, the Maverick Lodging company implements balanced scorecard to establish a measurement system and control the hotel level management. The balanced scorecard has several attributes, such as tracking financial performance, tracking nonfinancial measures and communicating franchisees and owners objectives of growth. For financial performance, according to Exhibit 7, the Maverick Courtyard has 3.77% growth rate, Maverick Fairfield Inn has 2.22% growth rate and Maverick Residence Inn has 3.5% growth rate. For flow-through flexible budget, both Maverick

1) Estimate the WACC that is appropriate for discounting the Collinsville plant’s incremental cash flows. You should estimate and present each component of the WACC separately, explaining briefly but clearly what assumptions you are making for each of them. In the same spirit, estimate the appropriate all-equity cost of capital for the APV-based valuation.

How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why?

We take Yields to Maturity of U.S.10 Year Treasury Note as the risk-free rate (rf). Long-term government bonds are the least risky among all financial assets. They are issued by the government so they have no default risk. Also, long-term bonds match the duration of Boston Beer’s cash flow better than short-term or medium-term bonds do. Therefore, we use the rate as our risk-free rate, which is 2.17% as of

9. What is the Cost of Debt, before and after taxes? Using the interest rate for the largest debt…cannot use the weighted interest rate for the debt since it includes capital lease obligations with no stated rate and could not find in the notes to the financials. 5.4% After tax cost is .054 x (1-.36) = 3.5%

In addition, as we are comparing the profit margin and operating profit margin, we notice that interest expense, from 2006 to 2010, consumed a relative small portion of sales proceeds comparing to 2011. In 2011, the profit margin for HH is -1.46% and the operating profit margin for HH is -0.74%. Since profit margin includes interest expense in the calculation while operating profit margin does not, we can conclude that HH has about the same amount in interest expense as the amount of operating loss before interest. This finally doubles the amount of company’s loss at the end of the cycle. This big amount of interest expense leads us to study HH’s leverage ratios.

2. How does Marriott use its estimate of its cost of capital? Does this make sense?

I take the “Long –Term U.S. Government Bond Returns from 1926-1987” as appropriate risk free rate from Exhibit 4. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. “Long –Term U.S. Government Bond Returns from 1926-1987” are include the whole lifetime of Marriot and are more or less risk free.

Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

• Compute a separate cost of capital (WACC) for the lodging business, contract services business and restaurant business.

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

The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is assessed separately.

The cost of debt (kd) rate of 13% was used after we assessed the key industrial financial ratios and compared them with that of Wrigley’s (See Appendix 2) to conclude that it was in the range between the BB rate of