Marriott corporation

Topics: Finance, Stock, Economics Pages: 8 (699 words) Published: January 12, 2015
Marriott corporation
Group -1
Akasha.J
Dhivya Priya.R
Gayathri.P.A
Sadhana.S
Srikumaran.M.A

Components of Marriott’s Financial Strategy
Growth Objective: Is to become the preferred employer and provider in lodging, contract services and restaurants, and to be the most profitable company in the industry. 1. Manage rather than own hotel assets:

 Lowers accounting assets on the books thereby increasing the ROA.  Sharing of risk that comes from the properties and provide Marriott to operate with more liquidity.
2. Invest in Projects that increase shareholder value:
 Analyzing potential projects and determining projects having a higher NPV. 3. Optimize the use of debt in the capital structure:
 By reducing debt, Marriott can decrease their D/E ratio – more attractive to existing and new shareholders.
4. Repurchase undervalued shares:
. Will positively affect share price and shareholder value. . As Marriott continues to make profits, buyback of shares increases the profit per share causing demand and price of the shares to increase.

. Overall, Marriott’s financial strategy aligns with their growth objective, although planning to buy back shares when they are undervalued may not be a good long term plan. Also, their strategy doesn’t address their interest in becoming a preferred employer.

Marriott’s cost of capital

Marriott business lines are lodging, restaurant and contract services Wd = 0.60,We = 0.40 ( Given)
Tax rate = ( Income taxes / Income before tax) = 44%
Cost of debt: Marriott uses cost of long term debt for lodging division and uses cost of short term debt for restaurant and contract service division  Cost of debt = Govt. interest rates + Debt rate premium






Maturity

Rate(%)

30 – year

8.95

10 – year

8.72

 Risk free return = 8.95%
 Market risk = 9.90%

 Rd = (0.0895+0.0872+0.0872)/3 + 0.013 = 0.101
 Re = Rf +(Rm – Rf) β

 Estimating Beta :
Beta of the firm can be calculated by first finding the beta unleveraged value. βu= βL / [1+(1-T) D/E]
= 0.97/ [1+0.44 (0.41/0.59)] = 0.6983
βL( firm)= βu [1+(1-T) D/E]
= 0.6983 [1+ (1- 0.44) 0.6/0.4] = 1.285
Re = Rf +(Rm – Rf) β
= 0.0895 + (0.099- 0.0895) = 0.1017

= [0.1017* 0.4] + [ 0.101*0.6*91-0.44)]
= 0.0746

Cost of capital for lodging
Wd = 0.74,We = 0.26 ( Given)
Tax rate = ( Income taxes / Income before tax) = 44%
Cost of debt = Govt. interest rates + Debt rate premium
Cost of long term debt ( 30 years) is used for lodging
Rd = 8.95+1.10 = 10.05%
Re = Rf +(Rm – Rf) β
Rf = 4.27% (Long term US govt. bond returns)
Estimating Beta : Beta for lodging can be obtained from beta of similar companies ( Hilton Hotels, Holiday Corp., La Quinta Motor Inns, Ramada Inns)  Unleveraged beta(βu) = βL / [1+(1-T) D/E]









Company

Unleveraged Beta

Hilton Hotels

0.8064

Holiday Corp.,

0.4699

La Quinta Motor Inns,

0.1692

Ramada Inns

0.4657

Average

0.4778

 Leveraged Beta: Since leverage affects beta , it must be adjusted to the risk of the project before it could be used.
 βL( Lodging )= βu [1+(1-T) D/E]
              = 0.4778 [1+ (1- 0.44) 0.74/0.26]  = 1.23935  Re = Rf +(Rm – Rf) β
 Re = 0.0427+ ( 0.099 – 0.0427) 1.23935 = 0.1125

 Wacc = [0.26 * 0.1125 ] + [ 0.74*0.1005(1-0.44)]
        = 0.07089
 Cost of capital for Restaurant :
Leveraged Beta

0.9033

Wd,We

0.42,0.58

Rd( 0.0872+0.018)

0.1052

Rf(Short term govt. bond)

0.0348

Wacc

0.0786

Comparable companies

Church’s fried,Collins foods, Frisch’s restaurants ,Luby’s cafeterias, McDonald’s, Wendy’s Int.

Contract Services:
From the exhibits and tables, we extract the following values, T= 0.44, Wd= 0.40, We=0.6, Rm= 0.099, Rf= 0.0348
Rd= government interest rate+ premium
= 0.0872+ 0.014 = 0.1012
β calculation:
Beta of contract services can be calculated from the beta of the whole firm, beta of lodging and beta of restaurants.Weights are...
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