Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. Arithmetic mean, Average, Capital asset pricing model 952 Words 5 Pages Marriott Corporation Abstract Marriott Corporation has three divisions — lodging, contract services and restaurants — with dissimilar operations. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. According to Harvard Business School, Marriott had three main lines of business: lodging, contract services and restaurants. Why did you choose these numbers? If the risk free rate is 5% and the expected return on the market is 12%, what is Ball Corp. When the general economic conditions are bad, people still use consumer goods Unilever and energy Royal Dutch Shell , so beta is less than 1. Understanding the estimation of capital costs helps identify the uncertainty of the cost-of- capital theory, sets a benchmark for cost-of- capital, helps.
Marriott had more confidence in its measure of warranted value than in the day-to-day market price of its stock. Arithmetic mean, Average, Cost of capital 1009 Words 3 Pages Cost of Capital Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The company enjoyed fast growth in both sales and assets at around. This similarity disciplines the pro forma analysis. Target leverage for each division was calculated by taking the average unlevered beta divided by the average levered beta.
Since the risk of division in Marriott is different from the average risk, we should estimate the beta for each of the division. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Marriott calculates the opportunity cost of capital by three inputs: debt capacity, debt cost and equity cost. In valuing any investment project or. What is the weighted average cost of capital for Marriott Corporation? Privately held companies do not report their results because they do not have to be compliant with the financial reporting requirements of publicly traded companies. To do this we estimate that the floating debt rate is best estimated using the 1yr government rate in Table B — for the reason that we do not have any shorter term data or average, and this most closely would represent floating. Using different rates for different divisions can be advantageous as different projects amongst different divisions might have different risk and reward. Furthermore, the company believed that repurchases of shares below warranted equity value were a better use of its cash flow and debt capacity than acquisitions or owning real estate.
In front of Dan Chores is the issue of recommending three hurdle rates for each of Marriott Corporation's three divisions, which have significant effect on the firm's financial and operating strategies as well as its incentive compensation. Beta: Levered Equity Beta for Marriott Corporation is provided in Exhibit 3. How does Marriott use its estimate of its cost of capital? What type of investments… 1153 Words 5 Pages Marriott Corporation: The Cost of Capital Executive Summary J. Thus, we use the U. Hence we would use geometric average for risk free rate and risk premium for each of the three divisions, as given in exhibit 5 of the case. Elements of each are as follows: Risk-free rate Rf : Returns from 1926 — 1987 provide the longest range of historic data.
In each of these areas, our goal is to be the preferred employer, the preferred provider, and the most profitable company. What implications do their differences have for the risk assumed by the various parties? This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. Do the acquisitions of U-Gene and gmi make sense? Valuation is based on standard assumptions. The second financial strategy was investing in projects that increase shareholder value. Management fees of 3% usually covered overhead cost of managing the hotel. Calculating Cost of Debt: Marriott risk free-rate is the government bond rate of 8.
Note the tax rate is 0 since there is no information of tax rates for other firms. Some students get involved in the wrong group, and others place little value on academics. This is just a sample partial case solution. Lodging generated 41% of 1987 sales and 51% of profits. We made a series of assumptions regarding either the available data or the missing information. To find the corporate interest tax rate, we should divide the income taxes by the before interest taxes. The reason behind this practice is the company's strategy which focuses on growth.
Thus, we choose to use the 30-year maturity U. The Cost of Debt was estimated as the risk free rate plus the Debt Rate Premium. We assume it is 100% equity financing. And the cost of capital for each division was updated annually. Arithmetic mean, Average, Finance 873 Words 3 Pages Marriot Corporation : the Cost of Capital. We estimated the cost of debt by multiplying the fraction of debt at the floating rate for each division by the long term rate for lodging plus the premium or the shorter term rates for the other 2 divisions plus the premiums.
Contract services provided food and services management to health-care and educational institutions and corporations. Hurdle Rate Because Marriott has various divisions, every division has their own risk. The only variable between these divisions that remains consistent is the tax rate. Restaurants provided 13% of 1987 sales and 16% of profits. Suppose Marriott spun off its restaurant business as a completely separate firm with the target capital.
Hotels ranged from the full-service, high-quality Marriott hotels and suites to the moderately priced Fairfield Inn. What will be the external financing requirements of the firm in those years? Usually a company repurchases their shares when it has reached the maturity stage of the growth cycle and signals little future business growth. The fourth financial strategy of repurchasing undervalued shares is also accordance with the growth objectives. As is stated on page 2 of the case, a key element of their financial strategy is to invest only in projects that increase shareholders value. A glimpse of history is useful to understand the current situation. Therefore, the cost of debt should be 9.
Words: 2673 - Pages: 11. We take the longest time period available as we believe this is the conservative method as outliers in the data is crowded out due to the law of large numbers, which increases the empirical probability of accuracy. Until the drop of income in 1989, which froze capital expenditures. Bonds, Credit, Financial markets 532 Words 4 Pages Executive Summary We found the weighted average cost of capital for Marriott as a whole to be 9. Note that there is no publicly traded comparable company. Do the cash budgets and the pro forma financial statements yield the same results? Please place the order on the website to order your own originally done case solution. Marriott needs to maintain this confidence moving forward.