Marriott Case Study

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Marriott Corporation Case Study

1)The Marriott Corporation implemented for key elements into their financial strategy: manage rather than own hotel assets invest in projects that increase shareholder value, optimize the use of debt in the capital structure, and repurchase undervalued shares

2)Marriott uses WACC to measure the opportunity costs of capital of investments with similar risks. Each division of Marriott has a different cost of capital, based on debt capacity, debt cost, and equity cost. They use the estimate of cost of capital to determine the fraction of debt that should be floating rate debt. WACC is also used to determine the premium above government bond rates for their unsecured debt. This makes sense because the different divisions have different risks. For example, restaurants may be seen as riskier than lodging as evidenced through its higher debt rate premium above government bond rates.

3)The weighted average cost of capital is 5.998%. (Appendix 1) a)The Risk free rate is the return on long-term US government bonds and the risk premium is the spread between S&P 500 Composite returns and long-term US government bond returns. b)Marriott’s cost of debt is the spread between S&P 500 Composite returns and long-term, high-grade corporate bonds.

4)If Marriott only uses a single hurdle rate for the entire corporation, they may forgo potentially profitable projects for one of the division lines. For example, if the hurdle rate of the lodging division is lower than the corporation hurdle rate, Marriott will not invest in the project even if it is profitable for the division.

5)The cost of capital for lodging for the lodging and restaurant divisions are 9.77% and 7.84% respectively. (Appendix 2) a)The Risk free rate is the return on long-term US government bonds and the risk premium is the spread between S&P 500 Composite returns and long-term US government bond returns. b)To measure debt, we used the US Government interest rates...
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