Marriott is determined to develop and to enhance its position in each division and remain a premier growth company as stated in the annual report 1987. And the debt betas for lodging, restaurant, and contract service are 0. This is just a sample partial case solution. Consequently, we chose the 1987 Long-Term Equity Spread rate even though it is over a shorter window because the 1987 rate is consistent with the Long-Term Equity Spread rate from 1926-1987, the longest estimation window provided. The company chooses to use cost of capital as its hurdle rate.
A firm that generates higher than it costs the company to raise the capital needed for that investment is earning excess returns. This method is applied for Marriott as the whole corporation and for each of its three lines of business. In 1976, Marriott attempted this by opening two theme parks. Should the debt cost differ across divisions? Over time a single hurdle rate if consistently higher than the existing approach would significantly hurt the performance of company as the approach could lead Marriott to reject or accept investment opportunities which should have been accepted or rejected. The pre-tax cost of debt for the lodging division is 10. In calculating rates, he had to face two major problems.
Please place the order on the website to order your own originally done case solution. Lodging DivisionTo calculate the cost of equity of the Lodging Division, we used the average unlevered beta of the comparable companies to determine the unlevered beta of the Lodging Division because the division's beta was not provided. The fraction of debt was found on a floating-rate debt basis and was sensitive to the interest rate changes. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. For these changes to be effective, Apple and foreign multinationals must have agreement with major factory owners.
We use the revenue as the catalyst for the weighing of the?. March 18, 1998 Marriott Corporation: The Cost of Capital In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rates at each of the firm 's three divisions. Mathematical this can be expressed as:? Using the highest and longest as the risk free interest rate provided by the U. The tax rate used is 34%, the highest corporate tax between 1986-1992. This time, we use the 1-day risk-free rate due to the even shorter lifespan of contracts. In order to calculate the cost of capital for the contract service division I will use most of the formulas I stated on question number three. The gurus listed in this website are not affiliated with GuruFocus.
We need to calculate the weight of equity and the weight of debt. The company enjoyed fast growth in both sales and assets at around… 2323 Words 10 Pages Marriott Corporation: The Cost of Capital Abridged Are the four components of Marriot 's financial strategy consistent with its growth objective? Company Background Marriott International Inc. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. How are hurdle rates used at Marriott? Betas for lodging and restaurants divisions can be calculated from comparable companies. I have also cited any sources from which I used data, ideas or words; either quoted directly or paraphrased I also certify that this paper was prepared by me my team specifically for this course. We will take Hilton Corporation of lodging as an example, In the above formula, we have already known the beta for M, R and L, we could calculate beta for contract services if we have the weight of asset for each division.
What is the weighted average cost of capital for Marriott Corporation? Solution What risk-free rate and risk premium did you use to calculate the cost of equity? After finding the debt ratio and asset beta for each company, the average asset beta is then used as the divisional asset beta. Therefore government rate for 30, 10 and 1 year bond is used from Table B, which is used with respective spreads to arrive at the debt servicing cost of 10. This results in fast, stable returns, which is good for continued growth. Lodging Contract Services Restaurant Marriott Corp. If Marriott used a single corporate hurdle rate for evaluating 9 investment opportunities in each of its lines of business, what would happen to the company over time? Again, this is due to a mix of long term and shorter term fixed debit. Fundamental company data provided by Morningstar, updated daily.
How can you estimate its equity costs without publicly traded comparable companies? As the risk entailed in each division is different, Marriott should discount divisional projects at the division's hurdle rate. Estimated debt beta and asset beta from other corporations within the same industry page 6 First of all, we uses 8. They opened a root beer restaurant. Marriott Case Marriott Corporation, an American firm, has 3 major lines of business: lodging, contract service and restaurants. This strategy means that Marriott are confident in its future performance.
Calculating Cost of Equity 7 i. This is beneficial or any project that arises out of the lodging division will be rejected since its cost of capital of 9. Please also see excel spreadsheet included within this submission for breakdown of the calculations. An example of this would be that the long term rate is used for calculating hurdle rate for Marriott Corporations and lodging, while short term rate is used for calculating hurdle rate for restaurant and contract services. Besides, it also serves more than 100,000 charitable and 2356 words - 10 pages ------------------------------------------------- Heinz has reached an unstable point in its business cycle and must calculate an appropriate cost of capital during these uncertain times.
They then run the hotels, taking a 20% cut of the profits in addition to a 3% management fee. Marriott International Inc's is 11. The cost of capital varied across the three divisions because all three of the cost-of-capital inputs could differ for each division. Past performance is a poor indicator of future performance. Stock quotes provided by InterActive Data. Under this method, we lever the previously found firm-wide βU of. Marriott International Inc's is 11.