Marriott Corporation Cost of Capital

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

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.

Marriott is renowned for its elegant and comfortable hotels and resorts. The company caters to a targeted customer base, ranging from the frequent corporate business traveler to the family enjoying their occasional weekend get-away. Marriott has continued its rise in the lodging, contract services, and restaurant industries. The company continuously strives to meet the needs and wants of its customers while strategically maneuvering the rigors of today’s competitive and ever-evolving market of glamorous destinations and convenient services. In order to remain relevant in a highly-competitive environment, Marriott must strike that successful balance of minimizing costs, and gaining and effectively

Managing debt levels to maintain an investment grade credit rating as well as operate with an efficient capital structure for its growth plans and industry

As Market risk premium I take the “Spread between S& P 500 Composite Returns and Long-Term U.S. Government Bond Returns 1926-1987” from Exhibit 5 as appropriate value.

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

Management is concerned about the higher interest rates resulting from the long-term debt obligations being created. Refinancing of bank credit into long-term notes has caused a material amount of interest increases and notes to be secured by stock of the company and its subsidiaries. Restrictions on indebtedness, net worth and fixed charge ratios must be adhered to in conjunction with the notes created. Policies and procedures will formulate to allow the company to maintain compliance but may impact the current business operations (F. Phillips, 2006)..

To evaluate the economics of increased leverage, determined two key numbers in the spirit of the Adjusted Present Value (APV) technique: the present value of the tax savings generated, and the cost of financial distress caused by the increased risk of default. We calculated the present value of the tax-shield is calculated using the formula: tax rate × BV of Debt, assuming that the discount rate and the debt’s interest rates are equal. For the risk

We assume linear increase in the EBIT and EBITDA at 3% for 1999 from 1998 figures. Considering the debt will be long-term, we test both 10- and 20-year corporate yields as interest rates to see what would be the coverage ratios, using the 1999 projected figures.

In July 2002, an investment banker advising Deluxe Corporation must prepare recommendations for the company’s board of directors regarding the firm’s financial policy. Some special considerations are the mix of debt and equity, maintenance of financial flexibility, and the preservation of an investment-grade bond rating. Complicating the assessment are low growth and technological obsolescence in the firm’s core business. The purpose is to recommend an appropriate financial policy for the firm and, in support of that recommendation, to show the impact on the firm’s cost of capital, financial flexibility (i.e., unused debt capacity), bond rating, and other considerations.

The Marriott family owns approximately 30% of MI, controlling roughly 14% of MI’s outstanding stock (Rosenwald, 2011). MI’s executive council is fairly similar to many other companies. Their executive council consists of 17 people, with a recent change due to J.W. Marriott stepping down from his CEO position. (Appendix 1.2) J.W. Marriott Jr. was CEO of MI from 1972 up until March 2012; though he has stepped down as CEO he is still an active and vocal contributor to MI. The new President and CEO of the company Arne M. Sorenson, is the first person without the Marriott name to take on a large role in the company. MI has nearly 3,800 properties in 74 countries and territories, 3,100 properties being in North America. There are over 275 properties in Europe, 65 in the Caribbean and Latin America, 40 in the Middle East and Africa and 29 in the Asia-Pacific. MI made up 4.8% of the market share in 2011, making it the number one ranked hotel globally (Marriott, 2013). Currently, MI has approximately 300,000 employees (Marriott, 2013).

The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their respective quantitative contributions to the entire amount of funding, serving hence as an allocation base, into account. As there is a direct relationship between the two portions, debt and equity, in order to calculate

We also were given Marriott’s target debt to equity ratios and a tax rate for which we had to adjust the unlevered betas. We estimated Marriott’s future

In 2014 Hilton saw a $.005 cent decrease in their ability to meet their short term debts. While in the scope of the overall operation this decrease may not seem significant, when related to Hilton’s low current ratio of 1.107, this result does not provide Hilton much cushion in meeting its current liabilities. This may give pause to potential creditors who may question their ability to meet their obligations. This also indicates that Hilton may benefit from varying their financing activities in order to achieve maximum return, obtaining new equity, or, working toward reducing their liabilities.

Owned hotels is not a scalable business model with the constraints of capital and also low returns business. Hotel Services / Royalty based business model offering them scope for improving the scale, higher margins and profitability. Even though improvement in margins and profitability ratios is positive, steep rise in debt is a key concern. As the company is aggressively growing its assets, the need for higher capital is consistently raising. As the company is spending over and above its internal accruals, the debt is constantly inching up. However, if the increase in cash flow from operations outpaces capex requirement, positive free cash flow will be generated. This will help in the re-payment of debts.