Marriott Corporation: The Cost of Capital
Introduction
Dan Cohrs of Marriott Corporation has the important task of determining correct hurdle rates for the entire corporation as well as each individual business segment. These rates are instrumental in determining which future projects to pursue and thus fundamentally important for Marriott’s growth trajectory. This case analysis seeks to examine Marriott’s financial strategy in comparison with its growth goals as well as evaluate a detailed breakdown of Marriott’s cost of capital – both divisionally and as a whole.
Financial Strategy and Growth
Marriot’s current financial strategy is in line with its overall goal of steady growth. By building and then promptly selling their hotels
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Assuming that Marriott’s unlevered beta can be calculated as a weighted average of its divisions’ betas based on identifiable assets, we can find Contract Services unlevered beta by solving:
Using some algebra, this yields an unlevered beta of 1.55 for Contract Services. Relevering with the
2/3 desired debt-to-equity ratio yields a levered beta of 2.13. This time, we use the 1-day risk-free rate due to the even shorter lifespan of contracts.
Cost of Capital – Marriott as a Whole
There are several ways to approach Marriott’s cost of capital as an entire firm. One way is to use
CAPM to find its cost of equity, long-term interest rates for the cost of debt, and weigh according to its capital structure to find WACC. Under this method, we lever the previously found firm-wide βU of .79 to the desired 3/2 debt-to-equity ratio to find a cost of equity of 17.12%. Next, we apply the CAPM using the 10-year Treasury for
1987 Assets % of total βunlev ered
Lodging 2777.4 60.6 % 0.47
Contract Services 1237.7 27.0 %
Restaurants 567.6 12.4 % 0.68
Total 4582.7 100.0 %
Contract Services
Rf 6.90 %
Market Premium 7.92 % βunlev ered 1.550
Target Debt % 40 % βlev ered 2.131
Cost of Equity 23.78 %
Cost of Debt 8.30 %
WACC 16.12 % the risk-free rate and the one-year arithmetic return for 1987. We use the arithmetic rather than geometric since
CAPM is a one-period model. For Marriott’s cost of debt, we add the
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
10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.
The cost of equity was found using CAPM, with the given market risk premium of 5%, a beta of .88, and risk-free rate of 4.03%. The beta was found by running a regression of Southwest’s percent change in stock price versus the S&P 500’s percent change in stock price for two years (June 28, 2000 to June 28, 2002). The risk-free rate was the return on a ten-year treasury note issued on June 28, 2002, according to the U.S. Treasury’s website. The tax rate of 39% was used to account for tax savings from leverage. In order to calculate the firm’s leverage, the market value of equity was found from the price per share on July 24, 2002 (Yahoo Finance) and the shares outstanding on the balance sheet of the July 10-Q report, as shown in Exhibit X. The debt value was approximated at the book value since data could not be found regarding its market value. This analysis resulted in a debt weight of 11.74% and equity weight of 88.26%. The final approximation for the weighted average cost of capital was 8.64%.
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
From the 2009 balance sheet, we know that the long-term debt level stands at $99m. We treated the remaining liabilities as current liabilities (for the bulk of it is), and since CL is part of working capital (hence temporary), we can leave it out of the capital structure. Therefore, after factoring in the tax benefits of debt and assuming that debt is valued at par value, the Weighted Average Cost of Capital for Papa John’s is approximately
2. How does Marriott use its estimate of its cost of capital? Does this make sense?
At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable
• What is the cost of capital for Marriott’s as a whole at the prevailing capital structure vs. at the target capital structure.
This case involves the study of the Hamilton Hotel and the use of forecasting to help predict their demand on a specific day. Marriott Hotels operated the Hamilton hotel. Marriott has been known for a culture that puts people first. Marriott is recognized worldwide for their enduring values, their spirit to serve, and their corporate commitment to creating better places to live and work.
The cost of capital is important as it forms the basis for Marriott’s investing and financial decisions. By understanding and knowing the cost of capital, Marriott is able to select relevant investment projects for the company, determine incentive compensation, and repurchase undervalued shares when needed.
Marriot’s cost of capital is the weighted average of the cost of company debt and the cost of company equity, which is mathematically the same as the weighted-average of the divisional costs of capital weighted based on net identifiable assets.
In 2004, Majestica had a market capitalization of $1.7 billion1 and generated revenue of more than $2.3 billion (see Exhibit 2). Majestica earned revenue both from hotel management and hotel ownership operations. In the past five years, Majestica shifted away from owning hotels and focused on managing hotels. In 2004, 80 per cent of Majestica’s earnings before other
When first looking at potential projects to pursue, we always prioritize determining which correct financial information to use when determining our project’s β (beta)(OR METRICS). When calculating the project beta we first determined our firm's levered beta. When comparing the monthly return data of Smitt corporation's stock over the past five years to the S&P 500 over the same time period, we are given a levered beta of 1.131.The next step is to remove our debt considerations from the thought process, which means calculating the unlevered beta. Using the previous five years of tax rates and debt/equity ratios, we were able to find the average sensitivity(OR beta) of all monthly returns to be .877.
Training is important to this segment to ensure that the revenue discipline have the most up to date knowledge of technical and revenue management function such as, Revenue Strategy/ Analysis, Business Evaluation and Inventory Management.
Marriott International, Inn is an American enhanced accommodation organization that oversees and establishments a wide arrangement of inns and related hotel offices. Established by J. Willard Marriott, the organization is currently driven by his child, Bill Marriott and Chief Officer Arne Sorenson. Marriott International has more than 4,087 properties in more than 80 nations and regions around the globe, more than 697,000 rooms (starting July 2014), and extra 195,000 rooms in the advancement pipeline. In June 2014, Marriott International opened their 4,000th inn, the Marriott Marquis in Washington, D.C. On November 16, 2015, Marriott said it would buy Starwood Hotels and Resorts Worldwide for $12.2 billion. The arrangement would make the world 's biggest lodging organization.