Marriott Case Solution

Topics: Stock, Finance, Weighted average cost of capital Pages: 3 (879 words) Published: August 22, 2013
MEMORANDUM
TO: Mariott Corporation Board of Directors
FROM: Chanunnett Manoonpong, Rennick Palley, Zhihui Zhang, Aaron (Jialin) Zhong DATE: August 22nd, 2013
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RE: Mariott Corporation Capital Structure
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Marriott Corporation, with its comparative advantage in hotel development and management, has expected excellent future growth and profitability. Such increase in sales might bring in extra cash flow, resulting in underutilized debt capacity. Therefore, we have performed a thorough analysis on the proposal of increasing debt ratio and repurchase the shares.

In 1974, Marriot Corporation was in a situation where it had limited access to a few funding resources. A significant amount of short maturities debt is used to finance the company. This financing approach put a heavy debt burden on Marriott, resulting in huge amount of debt repayments. Upon figuring out such heavy debt issue, Marriot broadened its potential lenders, opened up the financial market, refinanced with long term debts as well as to change financial policy to lower the leverage.

In 1975, Marriott shifts its hotel strategy from ownership to leasing and management contracts where they have a comparative advantage. Besides, Marriott has more opportunities than its chain competitors and individuals to accelerate the planned annual hotel growth because they were able to obtain financing for new hotels. So its business strategy was to keep on implementing the investment improvement strategy to where it had comparative advantages by building up the attendance of 2 Theme Parks and shifting from hotel ownership to outside ownership and management contracts. By doing so, it expected the profitability to increase from 6.6% in 1979 to 8.7% in 1983 and the ROE to increase to 20% by 1983. Since Mariott Corporation’s performance has been exceptional after the improvement program initiate in 1975, the...
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