BYP11-4 Marriott Corporation split into two companies: Host Marriott Corporation and Marriott International. Host Marriott retained ownership of the corporation’s vast hotel and other properties, while Marriott International, rather than owning hotels, managed them. The purpose of this split was to free Marriott International from the “baggage” associated with Host Marriott, thus allowing it to be more aggressive in its pursuit of growth. The following information (in millions) is provided for each corporation for their first full year operating as independent…
Dan Cohrs is preparing the annual hurdle rates for the three divisions of Marriot Corporation (Lodging, Contracts, and Restaurants) which will have a significant impact on the firm’s financial and operating strategies. Marriott’s has been truthful to its operating strategy to remain a premier growth company, Marriott’s sales and earnings per share have doubled over the last four years. In 1987 Marriot’s sales rose 24%, the return on equity was 22% and profits were $223 million. Lodging consisted of 51% of Marriott’s profits, while contracts services and restaurants amounted to 33% and 16% respectively. However, the sales mix is not proportionate to relative profits, where 41% of sales are generated from lodging, 46% from contract services and 13% from restaurants. One of the main factors in Marriot’s lodging success has been their strategy to syndicate hotels to limited partners with a three percent management fee and 20% of profits before depreciation and debt service. One of Marriot’s key strategic elements is to optimize the use of debt in the capital structure for which it uses an interest coverage target instead of debt to equity ratio to determine the ideal amount of debt to hold.…
My recommendation for Teletech Corporation is to change from a constant hurdle rate to the use of two risk-adjusted hurdle rates, one for each segment. Teletech’s performance is evaluated based on economic profit calculations. Through this measure, the risk-adjusted hurdle rates return a higher amount of profit compared to a single corporate hurdle rate.…
In 1999, the Maverick Lodging company implements balanced scorecard to establish a measurement system and control the hotel level management. The balanced scorecard has several attributes, such as tracking financial performance, tracking nonfinancial measures and communicating franchisees and owners objectives of growth. For financial performance, according to Exhibit 7, the Maverick Courtyard has 3.77% growth rate, Maverick Fairfield Inn has 2.22% growth rate and Maverick Residence Inn has 3.5% growth rate. For flow-through flexible budget, both Maverick Courtyard and Maverick Residence Inn have good score while only Maverick Fairfield has unexpected score. As a result, the financial performance is generally good for the company. However, nonfinancial figures indicate the company’s customer service quality is declining. According to guest-satisfaction score in Exhibit 7, all three hotels’ scores are lower than market average scores. The company has higher comprehensive audit performance than last year’s and employee turnover is decreasing. Although the company has some unexpected performances, it develops well in year 1999.…
Teletech Corporation currently uses its hurdle rate to measure its economic profit and NPV. It is used to measure value creation, and providing information on each unit’s performance for investors. Teletech’s current practice of “one size fits all” hurdle rate is not the best practice because each division has its own risks and nature of operations. Therefore, each division’s profitability should be compared to that division’s own WACC.…
Interpret Rick Phillips’s graph (see Figure 2 in the case). How does the choice of constant versus risk-adjusted hurdle rates affect the evaluation of Teletech’s two segments? What are the implications for Teletech’s resource-allocation strategy?…
Dan Cohrs, the vice president of project finance at Marriott Corporation, is preparing his annual recommendations for the hurdle rates for each of Marriott’s three divisions: lodging, contract services, and restaurants. However, this is a complicated process because finding beta, cost of debt, and cost of equity in order to find weighted average cost of capital, or WACC, must be calculated using proxy firms and divisional data.…
* It acts as a major link between the firm’s long-term investment decisions and the wealth of the owners as determined by investors in the market-place. It is, in effect, the “magic number” that is used to decide whether a proposed corporate investment will increase or decrease the firm’s stock price. Clearly, only those investments that are expected to increase stock price (NPV>0, or IRR>cost of capital) would be recommended.…
Our objective was to find the hurdle rates for Marriott’s three divisions and for the firm as a whole. Marriott should find the hurdle rates for its divisions separately because its divisions operate in separate industries and therefore face different business risks. Marriott’s vice president says that increasing the hurdle rate by 1% would decrease the present value of project inflows by 1%. Since finding appropriate hurdle rates is critical to accepting or rejecting projects, Marriott should be precise by calculating and using division-specific rates on division-specific projects.…
Thankfully, the need was not there to have to eliminate any positions or lay off any staff. We could keep all staff on board, which was the team goal early goal. We examined benefit costs per employee, and whether the merger would cause an increase in company subsidy for each employee, which would take away from the profit margins. After careful review of what both companies had to offer, we realized that the benefits package offered by Marriott International was more substantial and a better deal for both employees and the company. Although the employee out-of-pocket cost would slightly increase, the increase was not significant enough to make much of a difference to the staff, considering the extra benefits that would be accessible to them going forward.…
The company is currently using one hurdle rate. Teletech is currently using the hurdle rate to assess its two business segments. They look at return of capital on both segments and apply the same hurdle rate, which is also used for performance assessment. The hurdle rate was established using Teletech’s Weighted Average Cost of Capital (“WACC”) as a representation of the opportunity cost of money.…
From Exhibit 5, we get the total debt of Marriott at the end of 1979. We define total debt as sum of short-term loan, current portion of long-term debt, senior debt and capital leases. The average market price of Marriott in 1979 was $14.9, and interest rate for Baa corporate debt was 12%. We assume that Marriott would repurchase stocks at price of $15 using 12% debt financing. Marriott used Adjusted EBIT over net interest as a measure for debt capacity, so we use such measure as well.…
b. I believe that Marriott needs to worry about the quality of all the hotels whether they are owned or franchised. In order to keep customers satisfied and coming back to stay at a Marriott they need to keep a good reputation.…
“Marriott International, Inc. is a worldwide operator and franchisor of hotels and related lodging facilities. The Company operations are grouped into five business segments, the North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, Luxury Lodging and Timeshare. Marriott develops, operates and franchises hotels and corporate housing properties under separate brand names, and it develops, operates and markets timeshare, fractional ownership and residential properties under four separate brand names. Marriott International also provides services to home/condominium owner associations for projects associated with one of its brands” (MSN Money Report, 2010). Marriott International has carried out certain strategy resulted into effective market share and good profitability. Has left other businesses and…
to evaluate all segments of the company versus a riskadjusted hurdle-rate system. The tasks for the student…