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Marriott CASE STUDY

Company Goals
Its growth objective is to remain a
premier growth company by:
a. Aggressively developing appropriate
opportunities within existing line of
business

b. Becoming the preferred employer,


preferred provider, and the most profitable
company in existing line of business

Problem
To find out suitable Hurdle Rate to be
used as a discount rate for cash
inflows, to evaluate various projects
that Marriott Corpaoration may
undertake in the future.

Financial Strategy
Hurdle Rate is the minimum rate of
return that must be met for a
company to undertake a particular
project.
Selection of investment project by
discounting expected cash flow at
hurdle rate for each division.

Cost of Capital and the


Company
Company measures opportunity cost of capital
for investment with similar risk using the
Weighted Average Cost of Capital
The RF for long term is the 30 Year US
Government bond rate, 8.95% (Used by Marriott
and Lodging Division)
The RF for short is the 1 Year US Government
bond rate, 6.90% (Used by the Restaurant and
Contract Services Division)

Marriott use the Weighted-Average-Cost of Capital (WACC) method to measure the opportunity
cost for investments
WACC = (1- Tax Rate) x Cost of Debt x _D _
E+D

+ Cost of Equity x
E+D

E_

WACC = (1- 0.44)(0.1010)(0.60) + (0.1029)(0.40) = 0.751


Marriotts WACC = 7.51%

Market Risk Premium is MRP = 0.91%


Risk free rate is assumed according to Table A and Table B given in the case
Equity to Total Capital ratio and Debt to Total Capital ratio is calculated as per the formula
Equity ratio =
E+D

and Debt ratio = D__


E+D

All WACC calculations are based on target values for Debt and Equity
Leveraged 's have been used for WACC calculations

ALTERNATIVE COURSES OF
ACTION: ANALYSIS
ACA 1

ACA 2

ACA 3

Invest in projects that would


increase shareholder wealth

Sell undervalued assets


based on the hurdle rates

Do nothing

Research more on other


companies and/or equities
that may have potential for
acquisition.

Evaluate and further plan on


selling the underperforming
assets per division so as not
to pull the profits coming
from the other companies
that are performing well.

If the results show that there


is no need for further changes
since the divisions are
already performing as
expected.

Marriott's growth objective is to become the preferred


employer and provider in lodging, contract services (such as
catering), and restaurants, and to be the most profitable
company in the industry.
By choosing to manage hotel properties instead of owning
them, Marriott lowers their accounting assets on the books,
therefore increasing their return on assets as compared to
owning the properties outright. This strategy also effectively
shares the risk that comes from the properties, and lets
Marriott operate with more liquidity, offering them the
opportunity to relocate their hotel or restaurant operations
without the need to sell properties.
Marriott can analyze potential projects and discount the
future cash flows to determine which projects will have a higher
net present value, and ultimately which will be most profitable
to Marriott at the present time, therefore increasing
shareholder wealth.
Based on the WACC presented, for the company and its
various divisions, the resulting values are different.

Analysis and Conclusion


The hurdle rate that Marriott should use is
7.51%. This rate is subjected to variations as the
market premium changes. Marriott has to choose
a risk value for each of the business and then go
for combining the hurdle rates for different
business to form a portfolio and decide upon
which business to invest in. As the risk in a
business changes, the value would change thus
changing the hurdle rate. The future rates that the
firm has used to predict the WACC are themselves
prone to change with time. Hence, WACC needs to
be updated regularly to make accurate decision.

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