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SRIJON MOITRA-17023
NAVEEN HISSARIA-17010
HARSHITA PARASRAMPURIA-17009
SHUBHAM RAJ-17021
AVIK KUMAR DUTTA-17028
SHOUVIK SARKAR-17019
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ANKITA CHAKRABARTI-17004
RAHUL BASAK-17018
PROSENJIT ROY-17014
VIDUSHI BHARTI- 17026
WAIBHAV KRISHNA AGRAWAL- 17027
COMPANY BACKGROUND
• Began with J. Willard Marriott’s root beer stand in the Year 1927
• Grew into one of the leading lodging and food service companies
• Today it is run by J.W Marriott, Jr is a chairman of the Board and Chief Executive
Officer(CEO)
• William J Shaw is President and Chief operating Officer
• 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 strategy is to be a premier growth company, to be a preferred employer,
provider and the most profitable company.
VISION AND MISSION OF MARRIOTT
VISION
To become the premiere provider and facilitator of leisure and vacation experiences in the
world.
MISSION
To enhance the lives of our customers by creating and enabling unsurpassed vacation and
leisure experiences.
SOURCES OF REVENUE
JW Marriott earned revenue through the Following Areas.
• Lines of business:
Lodging
Contract services
Restaurants
• Lodging operations included 361 hotels, and through lodging in 1987 they earned
41% sales and 51% profits
• Contract Services provided Food and Service management to Health care and
Educational Institutions, and also catering and airline services through international
operations
• Contract services generated 46% of 1987 sales and 33%of profits
• Restaurants provided 13% of 1987 sales and 16% profits
COMPETITORS OF MARRIOTT
Hilton Hotels and resorts
Taj Hotels
FINANCIAL STRATEGY
• Selection of investment project by discounting expected cash flow at hurdle rate for
each divisions.
• – Hurdle rate is the minimum rate of return that must be met for a company to
undertake a particular project.
For example,
50%
40%
30%
0%
1 2 3 4 5 6
-10%
-20%
ELEMENTS OF STRATEGY
I. Manage rather than own hotel assets
Invests in projects that increase shareholder’s value- the company used discounted cash
flow techniques to evaluate potential investments.
Optimize the use of Debt in the capital structure- It used an interest coverage target
instead of a target debt to equity ratio. In 1987 Marriott had about $2.5 billion of debt which
comprised of 59% of Total capital.
Interpreted as
Interpreted as
ELEMENTS OF WACC CONTD…
• Cost of equity- The cost of equity is the return a company requires to
decide if an investment meets capital return requirements; it is often
used as a capital budgeting threshold for required rate of return.
Interpreted as-
• Cost of debt- Cost of debt refers to the effective rate a company pays
on its current debt. In most cases, this phrase refers to after-tax cost of
debt, but it also refers to a company's cost of debt before taking taxes
into account. The difference in cost of debt before and after taxes lies in
the fact that interest expenses are deductible.
Interpreted as-
DIVISION OF MARKET VALUE AND
TARGET LEVERAGE RATIOS
ANALYSIS OF CASE STUDY
What is the weighted average cost of capital
for Marriott Corporation?
Marriott Corp utilizes the Capital Asset Pricing Model (CAPM) to derive their cost of equity:
re = Rf + Beta (Rm - Rf )
Market risk-premium is calculated by rm - rf . The spread between S&P 500 Composite Returns and
Long-Term U.S. Government bond returns for the year 1926-87 is 7.43%, given by Exhibit 5.
Rf is constituted by the government bond rate of 8.95%. Using the highest and longest as the risk free
interest rate provided by the U.S government in April 1988, given by Table B.
Value Source
Equity Beta = 1.1 See Exhibit 3
Asset Beta = .667 D/E = .4/.6
βL = βu (1 + (1 – τ) (D/E))
= 1.1 (1 + (1 – .34) (.4/.6))
= 1.584
re = 8.95% + 1.584 (7.43%) = 20.72%
HOW DID WE MEASURE MARRIOTT’S COST
OF DEBT?
Calculating Cost of Debt:
Marriott risk free-rate is the government bond rate of 8.95%, obtained from
Table B. Marriott’s Debt Rate Premium is found as the credit spread on Table A,
1.30%. Book definition: Cost of debt = Risk free rate +Spread Thus,
Rd = government bond rate + credit spread= 8.95% + 1.30% = 10.25%
*Spread is based on riskiness of company
WHAT TYPE OF INVESTMENTS WOULD
YOU VALUE USING MARRIOTT’S WACC?
Since the WACC is 12.35%, any investments with a WACC equal or lower than
12.35% would be an investment to be considered of value by Marriott. The
company will continue to look at other investments that will lower their WACC.
The type of investment to be considered is issuing bonds to get the financing
more cheaply.
The firm is built upon lodging, contract services and restaurants as the three
key operations. By continuing investments in their three key operations has
created different WACC for each operation versus the whole company.
Marriott can seek projects that will increase shareholders’ value by expanding
its investment interests.
WHAT IS THE COST OF CAPITAL FOR MARRIOTT’S
CONTRACT SERVICES DIVISION?
To calculate the cost of capital for the contract services is more complex
because there aren’t any publicly traded peer companies to compare
against and privately held firms either do not report their results or do not
report results compliant with the financial reporting requirements of
publicly traded companies.
Based on the projected mix of fixed and floating debt, the cost of debt
for the contract services division is estimated at 10.07%
WHAT IS THE WACC FOR MARRIOTT’S
CONTRACT SERVICES DIVISION ?
Cost of Equity for Contract Services: Using the target debt ratio of 40% βcs = βu
(1 + (1 – τ) (D/E)) = 1.0907 (1 + (1 – .34) (.4/.6)) = 1.571
Using CAPM:
re = rf + βTs (rm – rf ) = 6.9% + 1.571(8.47%) = 20.20%