Marriott Case

* Interest rate had a 125bp spread over the current yield on 10-year US Treasury bonds (=4.25%).

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

Marriott Corporation began from root bear stand, and developed to be the leading supplier of food services and leading logging company in the U.S. The leading parts of the business were lodging, contract services, and restaurants. Their intentions regarding the business strategy was to focus on employees and customer satisfaction. In that way, they can remain the leading growth company. The financial strategies used were:

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

3. A 2 – year Treasury security currently earns 5.13%. Over the next 2 years, the real

Marriott’s original chain of Hot Shoppes continued to make strides along with the acquired chains of Bob’s Big Boy and Roy Rogers’s restaurants to provide 13% of 1987 sales and 16% of profits (HBR, 9-298-101). The restaurants segment held 12.4% of identifiable assets.

By 1980, more than 23,000 rooms were offered through 55 hotels and resorts located primarily in the U.S. Approximately 70% of company-operated rooms were owned by outside investors and managed by Marriott under agreements averaging 70 years in length. These management agreements contributed approximately $40 million to operating profits in 1979—profits that tended to rise with inflation. Contract Food Service (32% of sales)—Marriott operated almost 300 contract food units, providing a wide range of food service capabilities to a variety of clients. It was the world 's leading supplier of catering services to airlines, with 62 flight kitchens serving domestic and international air travelers. The Food Service Management Division also managed restaurants, cafeterias, conference centers and other facilities for over 200 clients, including business, health care, and educational institutions. Restaurants (25% of sales)—Marriott 's Restaurant Group consisted of 476 company-owned units offering a variety of popularly priced food in 46 states. Roy Rogers fast food restaurants and Big Boy coffee shops accounted for 92% of the total units. Theme Parks and Cruise Ships (8% of sales)—The two Great America theme parks, located in Gurnee, Illinois, between Chicago and, Milwaukee, and in Santa Clara, California, were opened in 1976. Both parks combined a wide variety of thrill and

The Warsaw Marriott case that’s assessed in this paper is a decision case where Stan Bruns (at the time general manager of the Warsaw Marriott) had to make important decisions regarding its pricing strategy and think of ways to protect Marriott’s work force from its comp set.

For the risk-free rate (rRF) we used the yield for a 20-year treasury bond in 2002:

Since its foundation in 1927 Marriott Corporation grew into one of the leading lodging and food services in the US. With three major business lines: lodging, contract services and related business, Marriott has the intention to remain a premier growth company. To achieve this goal the corporation’s strategy is to develop aggressively appropriate opportunities within their business lines. Marriott would like to be the preferred employer, the preferred provider and the most profitable company in each of the operating areas. The financial strategy includes four key elements:

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

• What is the cost of capital for Marriott’s as a whole at the prevailing capital structure vs. at the target capital structure.

Knowing now how much debt it would like to carry Marriott can now lever up to meet those levels. This brings us to their second issue, what to do with these new funds. Management has identified two general categories of investments: (1) promoting growth by expanding existing operations or diversifying into new businesses; or (2) returning capital to the shareholders by increasing the company's dividends or by buying back some of the outstanding stock. To valuate the possible projects associated with category (1), I would guess that simple NPV or IRR calculations would suffice in determining with projects represented the highest value to the firm. With regards to the possibilities of the second category, determining their overall effects on the corporations WACC would be a useful tool in determining which action would be best to take.

This is estimated using the data given in case (Exhibit 1). Considering the tax rates of last ten

* We assume a risk-free rate of 5.09%. This number comes from the current yield of the 30 year T-bond as shown in Exhibit 5.