The Marriot Corporation
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Executive Summary
The Marriot Corporation began in 1927 with J. Willard Marriott’s root beer stand. In the last 60 years, the Marriot Corporation grew into one of the leading lodging, and food service companies in the United States, with profits of $223 million and sales of $6.5 billion in 1987. The company consists of three divisions; lodging, restaurants and contract services that generate 41, 13, and 46% of sales, respectively. The company’s strategy is to be a premier growth company, to be a preferred employer, provider and the most profitable company.
The cost of capital of the Marriott Corporation and its three divisions must be evaluated to decide which investment projects will be selected for the upcoming year. This requires calculating the risk of each division based on the comparable companies in the market. Once the cost of capital and the expected return is determined, the divisions can be evaluated for any change in their capital structure.
Assumptions
1) The tax rate was determined to be 41.6% on average based on the Financial History of Marriott Corporation from 1978 to 1987.
2) Marriott Corporation used long-term debt for the cost of debt for its lodging, therefore the 30-year US Government Interest Rate of 8.95% was used for this case analysis. This is to be consistent to match the time frame of long-term debt.
3) Marriott Corporation used the cost of short-term debt as the cost of debt for its restaurant and contract services, therefore a 1-year US Government Interest Rate was used for this case analysis. The 1-year US Government rates was used to approximate current inflation.
4) The comparable companies only consisted of hotel and restaurant companies. Contract services beta must be determined using this information.
5) Marriott Corporation is looking to stay on the trend to double sales and earnings per share every four years.
Main Issue/Opportunity Marriott Corporation needs to determine hurdle rates for the company as a whole and for each division to evaluate the company’s financial strategy, which is
manage rather than own
invest in projects that increase shareholder value
optimize the use of debt in the capital structure
repurchase undervalued shares
Evaluating the company’s hurdle rates is critical because Marriott’s strategy is to continue to grow and to continue the trend of doubling sales and earnings per share every 4-years. By calculating required return for a project and the expected return by shareholders, Marriott and its divisions can then be evaluated.
Insights to the Main Issue/Opportunity
The weighted average cost of capital (WACC) and Capital Asset Pricing Model
(CAPM) for Marriott and its three divisions must be calculated to determine if the hurdle rates should be adjusted. The WACC will define required return for an investment. The CAPM will define the expected return by the shareholders of the company. If the expected return does not meet or beat the required return, the investment should not be taken. The CAPM for each division should be calculated because the capital structure (financial leverage) for each division varies, and determining the cost of capital