Professional Documents
Culture Documents
2016
Case Analysis
Marriott Corporation
Team 11
Alexandra Stute
Jasurbek Djamalov
Michelle Rodriguez
Paul Leeflang
Sonia De Cia
Waqar Zaheer
Case Analysis
Marriott Corporation
The Marriott Corporation started working on 1927 growing until becoming one of the
biggest lodging and food service companies in the USA. By 1987, their profits have
grown to $223 million. Marriott major lines of business were lodging which gathered
up to 361 hotels, contract services offering food and services to health-care and
educational institutions, even catering; and restaurants.
In 1987, contract services were the line which generated more sales (46%), but lodging
was the one which reported more profits (51%).
Their financial strategy was based on:
Manage rather than own hotel assets; Marriott used to own an over $1 billion
hotel properties. But, after developing the hotels, they would sell it maintaining
its control plus 3% of the revenues and 20% of the profits.
Invest in projects that increase shareholder value: The Company would evaluate
the potential of the investment by using discounted cash flow techniques,
following the Company standard assumptions, so all the corporation would
follow the same line.
Optimize the use of debt in the capital structure by using an interest coverage
target instead of a target debt-to-equity ratio.
In order to show the investors, the value of the Corporation, we are going to analyze
two ratios, the Return on Invested Capital, and the Weighted Average Cost of
Capital.
Marriotts WACC
Weighted average Cost of Capital is basically to calculate the firms Cost of Capital in
which each kind is consistently weighted. There are two ways to finance the firm which
are Debt financing (Money borrowed from bank in the form of loan for which firm
has to pay interests) and Equity financing (Money raised through issuing share to the
public for which firm has to pay dividends to the shareholders with respect to their
nature of stocks) which includes all the components such as Common stock, Preferred
stock, Bonds, and Long-term debt. A firm can increase its WACC by increasing its Beta
which means a rise in the risk and rate of return on equity.
Sometimes investors take into consideration WACC in order to know whether they
should or shouldnt invest in the particular firm as WACC is actually the minimum
acceptable rate of return to generate returns to its investors.
Variables of WACC
Calculations
1. Find Weight of Debt (Wd or D/V) & Weight of Equity (Ws or E/V)
r = r + (r - r )
s
RF
PM
RF
Lodging Lines
Calculations
(14/86)
0.6965
(79/21
0.4345
(69/31)
0.3962
(65/35)
0.6667
Average
0.548475
Calculations
0.5485 * [1+(1
0.44)*(74/26)]
1.4227
Rpm
7.43%
3.
Calculations
SML
8.95% + (1.4227*7.43%)
0.1952
rd
10.05%
4.
Calculations
(74%)*(10.05%)*(1 0.44)+(26%)*(0.1952)
WACC
9.24%
WACC= 9.24%
Marriotts ROIC
Return on invested capital is a profitability ratio and it explains that how good a firm
is doing in using its capital to make profits. It tells us the return on the capital
invested in order to provide information to bond holder and stockholders. This ratio
is a snapshot to investors that how much return would they earn if they invest their
money in a firm. It is proved to be a better ratio than Return on Assets (ROA) and
Return on Equity (ROE). It is to make a comparison with firms cost of capital in
order to find out that whether the firm is creating value or not and It assets the
efficiency of a firm at allocating the capital to generate profits.
If the ROIC is greater than the weighted cost of capital of a firm than it shows that
firm is creating a value.
If the company foregoes trade discounts they will be having a higher liquidity for a
certain amount of time which could be used for his short-term financing requirements.
On the other hand, the business will not be able to grow as fast as it is wanted without
an additional loan or further financial support from the bank.
Calculations
The following calculation is the ROIC for the whole company not for the
division.
EBIT= 489.4
Invested Capital = 4,247.8 (Exhibit 1, footnote c)
ROIC = EBIT * (1-t) / Invested Capital
489.4*(1-0.44)/4,257.8
ROIC = 6.45%
ROIC = In this case, our invested capital are the capital expenditures in
Exhibit 2
ROIC = 220 * (1-0.44) / 1241.90
Potential ROIC Lodging Division= 9.92%
Conclusions
As can observed in the calculations above, the Return on Invested Capital for the
entire corporation is very different than from the lodging division. For the entire
corporation, can be affirmed that there is no value creation as the ROIC is smaller
than the WACC (ROIC = 6.45% < WACC = 9.24%).
On the other hand, for the lodging division, the potential ROIC is greater than the
WACC, and therefore, value is being created (ROIC = 9.92%
It can be concluded that, overall, the Marriott Corporation is not creating value,
although their lodging divisions actually are.