MEMORANDUM
TO: FROM: DATE: SUBJT: Professor Robert S. Hansen Abdullah Al-Gwaiz, Yun Yan, Chuanjie Lan, Minyuan Ma,and Avinav Sharma 09/09/2013 Assessment of Marriott’s Growth Strategy and Cost of Capital
In this memorandum we will first discuss the four strategies that Marriott has outlined to achieve its new goal of higher growth. Second, we evaluate the WACC approach that the Company uses to estimate its cost of capital, delineate how to apply the WACC method, and discuss its merits. The Company has outlined four strategies in order to achieve its growth objectives: Manage rather than own hotel assets The first strategy Marriott outlined is consistent with the Company’s objective of more growth. Managing, rather than owning hotels, will save more on capital for Marriott,and it will allow the Companyto invest in other profitable projects. Selling hotel assets will also pay for the high costs involved in building hotels in the short-term, such as construction costs and land purchases. Managing hotels will likely provide a consistent stream of income over time with relatively less risk. Moreover, this strategy also helps the Company share more of its risk with business partners. Invest in projects than increase shareholder value The second strategy may not be appropriate for the growth of the Company becausedebt forms a large percentage of Marriott’s capital structure.Focusing on increasing shareholder value can lead to larger agency problems between equity owners and bondholders, which increases costs for the Company. Therefore, only increasing shareholders’ value couldlower the value of Marriott, and it will work against achieving the goal of higher growth. Optimize the use of debt in the capital structure
Optimizing the debt-to-equity ratio is a condition for maximizing the value of the Company and minimizing the weighted average cost of capital (WACC). Thus, a lower WACC may facilitate the growth of the Company.Issuing debt also has the benefit of providing a tax-shield. However,the debt-taxshieldadds benefit only to an certain extent, after which it begins to decrease a company’s value. Other, non-debt-tax-shields can also decrease marginal benefit of more debt. Optimizing the level of debt, therefore, is crucial for prospects of growth and reduction of the cost of capital (WACCmin = Vmax). Repurchase undervalued shares Repurchasing shares may not be the optimal use of cash because of the opportunity cost involved. It may benefit the company, however, by putting upward pressure on the price of its shares, and therefore increasing its equity and firm value. The accuracy of the Company’s estimate of its share price is important for the strategy to be more effective. Estimating the cost of capital Marriott uses the WACC approach to estimate the cost of capital for the Company as whole and for each of its divisions. There are three inputs which Marriott uses: debt capacity, debt cost, and equity cost consistent with its level of debt. Since Marriott operates in three sectors, and given that each sector has a different sensitivity to changes in interest rates, the Company uses floating rate debt for a fraction of its debt level in each sector. In most cases, the WACC method is relatively accurate and provides reasonable estimatesof the discount rate. The calculated WACC for the whole Company is 9.82%. In estimatingthe WACC, we used the 30year interest rate onU.S. Treasury bondsas the long-term risk free rate, and the geometric average value of S&P from1926 to 1987 as the market return. The risk premium is equal to the market return minus longterm risk free rate. Since the WACC equation contains both equity and debt, we used theCapital Asset Pricing Model (CAPM)to calculate the cost of equity, and then added the debt premium to the long-term risk-free rate to get the cost of debt. Finally, we use target leverage of the whole company to get the WACC. In this calculation, we use the geometric average value because extreme
Project Part2 3/18/13 Ratio Analysis by Marriott Group *For each section please refer to the charts at the end Liquidity Ratios Liquidity ratios can be used to measure how fast the company can be liquidated. Generally speaking, a current ratio of 2:1 is preferred by most firms. In the case of Marriott, however, it is 0.52, which is a very low number. It shows that Marriott’s liabilities are far greater than its assets, and therefore it would take a relatively long time to liquidate the company…
Strategy Marriott’s goal is to be the preferred employer, preferred provider, and most profitable company when it comes to their lodging, contract services, and related businesses. Marriott lays a foundation for achieving their goal by creating and following four financial strategies. The first strategy states that Marriott should manage rather than own their hotel assets. By maintaining operating control over the sold assets, Marriot is able to have significant influence over the businesses operations…
EXECUTIVE SUMMARY Marriott International envisions itself to be the world’s lodging leader. Its mission is to provide the best possible lodging services experience to customers who vary in backgrounds, language, tradition, religion and cultures all around the world. Marriot is committed to environmental preservation through using environment-friendly technology and engages in social responsibility and community engagement. We value our shareholder’s so we will only take steps that will ensure…
(260524697) Fahad Syed (260528433) Case Analysis: Marriott Corporation: The Cost of Capital (Abridged) Problem Marriott Corporation must determine the appropriate annual hurdle rates at each of the firm’s three divisions in order to accurately value and determine whether they should partake in an investment project. Options Maintain the current capital structure Change their current capital structure by implementing target debt and equity ratios Recommendation Marriott should apply the target capital…
Tutorial 3 – Marriott Review the case available on the course website. You are required to submit a two page preparation document to your tutor in response to the following 5 questions: 1. Thinking of the resources and capabilities of Marriott throughout the case. Which of these resources do you consider. I may consider well organising rather than other resources. The business should be structured to reach maintain profit based on effective managing skills and developing company, for instance…
1. Identify several major categories of segmentation used by Marroitt. Marriott decided to enhance travelers’ value by segmenting the market and then targeting selected segments, each with a different brand. Then as now, Marriott was the flagship brand. Each new brand would support Marriott’s overall brand identity — a commitment to superior customer service — and train employees to have a passion for service. Marriott’s flagship brand continues to target customers needing fine restaurants…
........... 14 2 Summary of Investment thesis Marriott made further progress in increasing the size of its new hotel pipeline in 2014. Global system wide revenue per available room (revPAR) enjoyed another year-over-year increase, climbing 5.8%, with North America particularly strong at 6%. I estimate Marriott’s intrinsic value per share to be $44.85. Marriott’s stock price was overvalued to some extent. My current base case is for growth in revenue per available room of 5%-6% in 2014…
a points earner. Marriott Rewards has Residence Inn and Towneplace Suits properties which only earn 5 points$1, the different is 10 points $1 for Marriott brands. Marriott vs. Hilton 30,000 Hilton points buys a category 4 hotel reward night at a Hilton brand hotel. Extended stay rewards 4 or more nights offer discount rates, and points and money rewards 50% points plus cash. 20,000 Marriott Rewards points buys a category 4 hotel night at a Marriott brand hotel. Marriott does not have a…
Marriott International, Inc. is a global hotel chain with more than 3,000 properties in 68 countries. The corporation operates about 1,000 of its lodging facilities and obtains most if its revenue through leasing agreements and management fees from their property owners (Renner, 2010). The primarily measure performance among comparable properties through RevPAR (Revenue per Available Room) by dividing total room sales by the total room nights available to guest for that specific period (Renner, 2010)…
4. In your opinion, should Mr. Marriott recommend this project to the board? Be prepared to defend you opinion on class. Our group suggest Mr. Marriott recommend this project to the board, mainly on two major reasons. First, by splitting current Marriott Corporation into MII and HMC, they are able to focus on each of their core business competencies. For MII, without the burden of existing…