Marriott Corporation: the Cost of Capital

Topics: Weighted average cost of capital, Rate of return, Interest Pages: 13 (3318 words) Published: October 17, 2010
Case Analysis – Marriott|
Detailed - Individual Assignment |
Ankur Sharma|
Evening Accelerated MBA - T/Th – Class of 2011 |

W P Carey School of Business, Arizona State University|

The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is assessed separately. Marriott's growth objective Vs financial strategy

Marriot’s growth objective is to be the preferred employer, preferred provider and the most profitable company within the chosen line of businesses – lodging, contract services and related businesses. (P-145)

The first financial strategy of “managing rather than owing assets” is very consistent with Marriott’s growth objective. By selling the hotel assets, Marriot compliments its ROA (return on assets) thereby increasing potential profitability and its financial position in the market which indirectly reduces the risk of investment in the firm. Although, there is some business risk associated with this strategy as Marriott invests in the acquisition and development of these assets. There may exists barrier’s to exit if the real estate prices fall and Marriot incurs looses on the sale rather than proceeds. Also, once the ownership of the asset is transferred, buyer power and the treats of substitutes may influence Marriot’s profitability, once the asset belongs to someone else then they may chose a differ supplier and this gives an opportunity to other suppliers to enter the market and bid for the management contract.

Marriot uses the discounted cash-flow technique to evaluate potential investments hence the second financial strategy of ”Investing in projects that increase shareholders’ value” falls in line with Marriott’s growth objectives. This evaluation technique ensures than Marriott is investing only in profitable projects (with positive NPV – Net Present Value). Although, there is a business risk associated with this approach around the assumptions Marriott considers while discounting the future cash flows and the influence of market forces thereafter shaping the actual return stream.

The third financial strategy of “optimizing the use of debt in the capital structure” does reflect the sense of Marriott’s growth objectives. Marriot uses the weighted average cost of capital (WACC) to calculate its hurdle rates, which encompasses effect of the balance between debt and equity in the firm. Although, cost of debt is less than cost of equity but by getting too levered a firm can lose market credit and hence increasing the overall cost of capital. Through striving to optimize the use of debt in their capital structure, Marriot could increase profitability via the tax shield and increase value of the firm by achieving the optimum WACC.

The fourth financial strategy “repurchasing undervalued shares” can be assessed under two different viewpoints. First, it seems to be in line with Marriot’s growth objectives; as by buying back the undervalued shares, Marriott influences P/E (Price –Earning) ratio and can make investor’s holdings more valuable as share prices increase (increase in ROE). Interpreting this from a different perspective where we consider the effects of using cash to buy back shares, it seems Marriot would under invest in positive NPV projects, hence lowering growth. Thus, this strategy may be satisfying Marriot’s growth objective in short term but certainly pose otherwise in long term.

Marriot’s use of Cost-of-Capital estimate and its viability

Marriot used separate cost-of-capital estimates for each division. This approach makes sense as it incorporates the fact that risk among different divisions varies. Although they use a uniform systematic risk to calculate the cost of equity for all divisions, which really does not reflect the...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Marriott Corporation: the Cost of Capital Essay
  • Marriott Corporation Cost of Capital Essay
  • Essay about Marriott Corporation: the Cost of Capital
  • Marriott Corporation” the Cost of Capital Essay
  • Essay on Marriott Corporation: the Cost of Capital
  • Marriott Corporation: the Cost of Capital (Abridged) Essay
  • Marriott Corporation: the Cost of Capital Essay
  • Marriott Corporation: the Cost of Capital Essay

Become a StudyMode Member

Sign Up - It's Free