In April 1988 ,Dan Cohrs, Vice president of project finance was doing his Annual recommendation for the hurdle rates at each of the firm’s three division The Investment projects were to discount the cash flows using appropriate hurdle rate for each division
Began in 1927 By J. Willard Marriott’s root beer stand. In 1987 , it is now a top lodging and food service company The lines of business included:
Lodging such as
360 hotels, 100,000 rooms
high-quality Marriott hotels, and moderately priced fairfield inn Contract services such as
Food and services management, health care, educational institutions , and corporations Airline catering and airline services
Bob’s Big Boy,, Hot Shoppes, Roy Rogers
| Proportion of Sales 1987
| Proportion of Profit 1987
In 1987 Marriot had the following financial numbers, Sales grew by 24%, ROE is 22%, Profits: $223 million, Sales were $6.5 million. Sales and EPS have doubled over the 4 previous years a Marriot had Repurchased 13.6 million shares of its common stock for $429 million
As per 1987 annual report, Marriot Intended to remain premier growth company. It was aggressively developing appropriate opportunities within existing line of business. Moreover, it planned to become the preferred employer, preferred provider and the most profitable company in existing lines of business. After 1987, the Operating strategy was to continue at the same trend
Marriott’s Cost of Capital
Mr. Cohrs’s believes that the Divisional hurdle prices have important impact on the organization's financial and managing strategies Increasing hurdle rate reduces the NPV of the projects and investments. Decreasing hurdle prices improve the organization's growth. Financial Strategy
The graph shows an inverse relationship between hurdle rates and profit.
Marriott’s Financial Strategy
The strategy was made out of five points.
The first point was to Manage rather than own resort assets
In 1987, Marriott designed more than $1 million value of resort properties and became the 10th biggest property designers in US. Marriott was also using integrated progression process and identified markets. Marriott also created progression plans and Designed projects and evaluated potential profitability Company marketed resort resources to restricted partners, maintaining control management as common partner under lengthy lasting management contract
Marriott’s Financial Strategy
Manage rather than own hotel assets
Although this strategy has a risk of contract expiration it makes easier to expand. Management fee = 3% of earnings plus 20% of the income before devaluation and financial debt service 3% of earnings usually protected the expense cost of handling the hotel 20% of the income before devaluation and financial debt assistance required to take a position aside until investors gained a pres-pacified return Guaranteed a part of collaboration financial debt – in 1987: three accommodations and 70 courtyard accommodations were distributed for $890 million The company in whole managed about $7 million value of distributed hotels Marriott’s Syndication
Syndications is the Key system for investment spending budget system. It Invests $1 million resources each season, and provides off about $1 million resources each season in syndications Projects face a faster industry analyze than in the common business firm Since process changes over easily, assessment mistakes appear quickly Partnership submitting industry is the important investment industry for Marriott Projects with zero NPV just break even at submitting – great assurance in income and lower price rate system
Marriot syndication was of Syndication market and Private market. It was less effective than a public value market and with Limited information and...
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