Marriott Corporation: Cost of Capital

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April 11, 2012
Marriot Corporation: The Cost of Capital

Background:
Marriot Corporation began in 1927 with J. Willard Marriot’s root beer stand. Over the next 60 years, the company grew into one of the leading lodging and food service companies in the United States. Marriot has three major lines of business: lodging, contract services, and restaurants. Lodging operations included 361 hotels, with over 100,000 rooms that generated 41% of sales in 1987 and 51% of profits. Contract services provided food and services management which generated 46% of sales in 1987 and 33% of profits. Marriot’s restaurant division provided 13% of 1987 sales and 16% of profits. In April of 1988, Dan Cohrs, Vice President of project finance at the Marriot Corporation was preparing his annual recommendations for the hurdle rates at each of the firm’s three divisions.

Major Problem:
← What should Marriot use as hurdle rates for each line of business to achieve their financial goals?

Alternative Courses of Actions:
• Marriot should establish one single companywide hurdle rate that it will use to determine whether it will accept or reject investment projects. • Marriot should establish individual hurdle rates designated to each line of business: lodging, restaurant, and contract services that will determine whether it will accept or reject investment projects.

Brief Analysis of Alternatives:
• If Marriot utilizes one single companywide hurdle rate, they should use a hurdle rate of 11.89% which was found using the WACC method. This single companywide rate would make divisional managers obsolete because one manager could make investment decisions for all three divisions. This would instill consistency in all lines of businesses, by allowing the top manager to use this rate when determining whether to accept or reject investment projects. • If Marriot uses multiple hurdle rates for each division, the hurdle rate they should use for each division...
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