Marriott corporation the cost of capital. Marriott Corporation: the Cost of Capital 2019-01-11

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Marriott Corporation: The Cost of Capital by Zachary Connolly on Prezi

marriott corporation the cost of capital

S interest rates are different for the two divisions because the lodging division uses long-term 30-year and the restaurant division uses short-term 1-year. In the case is stated that Marriott required three inputs to determine the opportunity cost of capital: debt capacity, debt cost, and equity cost consistent with the amount of debt. Morgan discount local cash flows at a local required rate of return? As this type of decision making continues Marriott will be assuming higher risk as it to approve riskier projects. Lodging generated 41% of 1987 sales and 51% of profits. To determine the cost of capital, which also acted as hurdle rate for investment decision, cost of capital estimates were generated from each of the three business divisions; lodging, contract services and restaurants.

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Marriott Corporation Case Study: the Cost of Capital Essay

marriott corporation the cost of capital

This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. Understand the key assumptions, the basic concept and the specific sources of capital associated with the cost of capital. Contract services provided food and services management to health-care and educational institutions and corporations. Coogly Company is attempting to identify its weighted average cost of capital for the coming year and has hired you to answer some questions they have about the process. Calculating Cost of Debt: Marriott risk free-rate is the government bond rate of 8.


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Marriott Corporation Cost of Capital

marriott corporation the cost of capital

Also Marriott had its growth objective, to remain a premier growth company. The higher the hurdle rate, the riskier the project will have to be and the lower the hurdle rate is, the safer the project will be for a company. We could most likely have increased the accuracy of our calculations by being more due diligent in the selection to find companies that were a closer match to the Lodging and restaurant division. Do the cash budgets and the pro forma financial statements yield the same results? Compare the liabilities patterns feasible under the alternative production plans. Should Koh approve the investment? It also provided airline catering and airline services through its Marriott In-Flite Services and Host International operations. Debt capacity and the cost of debt Marriott applied its coverage-based financing policy to each of its divisions.

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Hbs Case “Marriott Corporation: the Cost of Capital” free essay sample

marriott corporation the cost of capital

The after-tax cost of debt for the lodging division is 6. Although the company has a significant amount of data and information for other divisions, the second concern is that it has limited data and information for contract services. Lodging: Competitor average unlevered beta 0. Used warranted value rather than market value. We believe this approach enables Marriott to optimize the financial performance and in turn increase the shareholder value. Ignore interest expense in making these estimates. Hardcopy, paperback, softbound, magazine: Physical copy shipped from our warehouse to your requested shipping location.

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Marriott case

marriott corporation the cost of capital

This is a very clever approach, particularly as we see that for example the lodging unit, has a 74% debt percentage in the capital structure, and the fact that Marriott use long term cost of debt for lodging which in this case is close to Government debt 110 bps margin demonstrates the low risk investors perceive this side of the business to have We believe this approach is sound due to the difference in the. In what currency are the cash flows denominated? Marriott Corporation began in 1927 with J. There was some interest, however, in basing the incentive compensation, in part, on a comparison of the divisional return on net assets and the market-based divisional hurdle rate. With the unlevered beta, we calculated Marriott's relevered beta using the target market value debt percentage in capital established in Table A of the case and the tax rate provided. How can you estimate its equity costs without publicly traded comparable companies? Within each divisional comparison to comparable companies, weighted average of {draw:frame} A is used as smaller companies have less impact on the overall segment. Figure A shows the substantial effect of hurdle rates on the anticipated net present value of projects. Keywords: ; ; ; ; ;.

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Weighted Average Cost of Capital and Marriott Corporation

marriott corporation the cost of capital

Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. Each line of business had a different spread between the debt rate and the government bond rate due the varying differences in risk. There is a strong connection among the capital structure or the debt factor with the stock prices of the company. In each of these areas our goal is to be the preferred employer, the preferred provider, and the most profitable company. Prepare pro forma income statements and balance sheets rather than cash budget to make this estimate. Discounted cash flow methods were used to assess potential investments.


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Case Study Sample Paper: Marriott Corporation: The Cost of Capital Case Study Sample

marriott corporation the cost of capital

The spread for the lodging and restaurant divisions are 1. What other alternatives does Mr. They use this number to determine which projects to accept, to adjust the rate at which the firm grows and as a measure for compensation within each business area, and as incentive compensation. Over time, Marriott will be approving more high risk project from the restaurant and contract service division by evaluating them at a lower rate, while they will be rejecting lower risk projects from the lodging division because they are using a higher rate. By seeking projects that would increase shareholder value and repurchasing undervalued shares, they ensure that the value of their equity does. The hurdle rates were based on market interest rates, project risk, and evaluations of risk premiums. Be sure you understand Exhibits 1, 2, 3, and 4 of the case.

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Marriott Corporation: the Cost of Capital Essay Example for Free

marriott corporation the cost of capital

It was small, just nine seats. Appendix Below are the costs of equity, debt, and capital for all of Marriott as well as its three divisions. By contrast, a 2756 words - 12 pages Nike, Inc. What do you think the investors are trying to accomplish? 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. Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects.

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Weighted Average Cost of Capital and Marriott Corporation

marriott corporation the cost of capital

We also have to choose the appropriate market risk premium and risk free rate. Why did you choose these numbers? The annual incentive compensation constituted a significant portion of total compensation ranging from 30% to 50% of base pay. We intend to remain a premier growth company. S government in April 1988, given by Table B. Appendices Solution-1 Marriott Beta Calculation for Lodging Market Value Actual Unlevered Asset Beta1 Target Leverage Hotels Leverage Levered Equity Beta Target Leverage Levered Equity Beta Hilton Hotels 0. Lodging Contract Services Restaurant Marriott Corp.


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Marriott Corporation: The Cost of Capital

marriott corporation the cost of capital

How can you estimate its equity cost without publicly traded comparable companies? The cost of capital varied across the three divisions because all three of the cost-of-capital inputs could differ for each division. However, with a few tricks for sorting information and making a plan that works for you, you can ace your next test and prepare for the future exams also. How did you measure the cost of debt for each division? Access to case studies expires six months after purchase date. Marriott Corporation consists of three lines of business: lodging, contract services, and restaurants. Using a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business will lead to accept bad projects and reject profitable projects.

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