HBR Case #1
Marriott Corporation: The Cost of Capital
Group 16—Tutorial Mon 11: 30am
LIU Ying, Chloe| 1155019350
LUO Yingying, Irika| 1155020931
TIAN Tian, Sarah| 1155019114
WU Jiajie, Jesse| 1155019061
17 September 2012
By simply 1987, Marriott Corporation acquired grown right into a large multi-dimensional company with over $5 billion possessions in hotels, contract solutions and eating places. The company appreciated fast development in equally sales and assets for around 16% per year coming from 1984 to 1987 and aimed to continue this craze into the near future. The administration was decided to develop the company into leading players in each profession and hence a great aggressive development objective have been set. It is financial strategies are in general consistent with their goal and would help fast expansion in the near future. Organization and divisional hurdle rates are computed in this statement with various presumptions and recommendations. Below is actually a table summarizing the financial data. | Lodging| Contract Services| Restaurant| Marriott Corp. | Risk-Free Rate (Rf)| 8. 72%| 8. 72%| 8. 72%| 8. 72%
Market Risk Premium (MRP)| 7. 43%| 7. 43%| 7. 43%| 7. 43%| Target D/V| 74%| 40%| 42%| 60 per cent
Current D/V | -| -| -| 41%
β leveraged| 0. 92| -| 1 . 04| 0. ninety-seven
β unlevered (βu)| 0. 53| -| 0. 90| 0. 75
β relevered (βl)| 1 . 37| 1 . 09| 1 . 27| 1 . 29
Expense of equity (Re)| 18. 90%| 17. 05%| 18. 15%| 18. 30%
Cost of personal debt (Rd)| on the lookout for. 03%| on the lookout for. 39%| being unfaithful. 16%| 9. 43%
Effective tax charge (t)| 43. 68%| 43. 68%| 43. 68%| 43. 68%| WACC| 8. 68%| 12. 35%| 12. 69%| 10. 51%
Overall, Contract Services section has the greatest weighted average cost of capital and Places to stay division has got the lowest. As different lines of business are different in nature, this kind of estimation is usually reasonable.
Financial Strategies of Marriott Corporation
Marriott Corporation can be an international business whose sales and profits per talk about had doubled in the previous 4 years, and so they intend to continue to be a premier growth firm. Marriott got three main lines of business: hotels, contract companies, and restaurants. In each of these areas, Marriott's objective will be the preferred employer, the preferred company, and the the majority of profitable business. To achieve these growth desired goals, Marriott has created a financial strategy with following four strategies, which are all consistent with Marriott's growth aim: i. Deal with rather than own hotel assets
In this technique, Marriott provides the hotel assets to limited lovers while maintaining operating control as the overall partner under a long-term managing contract. In this way, the company will be able to make use of the assets in the foreseeable future while freeing up more capital via fixed assets. As Marriott is arranging a fast creation, this percentage of freed-up capital would provide extra financing because of it. In addition , as managers gain ownership subject over the business asset, they are expected to be more motivated and work harder. This is because that under these kinds of arrangement, administration directly stocks and shares a portion of profits produced by the compant. Therefore , this plan is like company's expansion objective. 2. Invest in jobs that increase shareholders values Shareholders would be the real owners of the organization and to make value intended for shareholders should be to create value for the business in the long-term. Marriott uses discounted income techniques to evaluate potential investments and performs those with positive net present value. It can be beneficial as it considered time value of money and positive NPV jobs will enhance shareholder worth. This tactic is usually consistent with Marriot's growth target because it helps bring about Marriott to become a profitable company. iii. Boost the use of debts in the capital structure
Marriott determines how much debt in the capital structure by centering on its capability to service it is debt. The organization uses a targeted...
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