Marriott Corp. - the Cost of Capital

4186 Words17 Pages
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…show more content…
Lodging generated 41% of 1987 sales and 51% of profits. Contract services provided food and services management to health care and educational institutions and corporations. It also provided airline catering and airline services through its Marriott In-Flite Services and Host International operations. Contract services generated 46% of 1987 sales and 33% of profits. Marriott 's restaurants included Bob 's Big Boy, Roy Rogers, and Hot Shoppes. Restaurants provided 13% of 1987 sales and 16% of profits. Financial Strategy The four key elements of Marriott 's financial strategy were the following: • • • • 2 Manage rather than own hotel assets. Invest in projects that increase shareholder value. Optimize the use of debt in the capital structure. Repurchase undervalued shares. Marriott Corporation: The Cost of Capital 298-101 Manage rather than own hotel assets In 1987, Marriott developed more than $1 billion worth of hotel properties, making it one of the 10 largest commercial real estate developers in the United States. With a fully integrated development process, Marriott identified markets, created development plans, designed projects, and evaluated potential profitability. After development, the company sold the hotel assets to limited partners while retaining operating control as the general partner under a long-term management contract. Management fees typically equaled 3% of revenues plus 20% of the profits before

More about Marriott Corp. - the Cost of Capital

Get Access