As a high-quality corporate risk, Marriott could expect to pay a spread above the current government bond rates. As a rule of thumb, increasing the hurdle rate by 1% for example, from 12% to 12. Butler have to borrow so much money to support this profitable business? By contrast, a 2756 words - 12 pages Nike, Inc. Rf is the same risk-free base rate used to calculate cost of debt, in this case, 8. Why did Hampton repurchase a substantial fraction of its outstanding common stock? Hence to find the unleveraged beta, we take the average of the equity? No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School. How did you measure the cost of debt for each division? There was some interest, however, in basing the incentive compensation, in part, on a comparison of the divisional return on net assets and the market-based divisional hurdle rate.
As this type of decision making continues Marriott will be assuming higher risk as it to approve riskier projects. With the unlevered beta, we calculated Marriott's relevered beta using the target market value debt percentage in capital established in Table A of the case and the tax rate provided. Discounted cash flow methods were used to assess potential investments. Presentation Breakdown Executive Summary Case Questions Case Analysis Conclusion Bibliography Works Cited Averkamp, Harold. The after-tax cost of debt is 1-t x rd.
How did you measure the cost of debt for each division? Although, there is some business risk associated with this strategy as Marriott invests in the acquisition and development of these assets. The cost of debt should be different across each division because each division is treated as an independent company. Given this we have selected 1926-87 average returns of the long-term U. Asset risk is the only thing that is comparable across firms. The result is varying capital costs between the divisions.
Access to case studies expires six months after purchase date. If you are covering a lot of material, it may seem complicated and confusing to compile them into one useful study material. What are the major risks associated with the proposed loan? This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. Profit rate for a hotel is its net present value divided by its cost. Under this method, we lever the previously found firm-wide βU of. Determine the cost of long-term debt and the cost of preferred stock.
Frankenthal had to decide which of the offers would best fit his goals. Invest in projects that increase shareholder value The company used discounted cash flow techniques to evaluate potential investments. The consortium is proposing to invest 122 million Euros of equity by 2003 in return for 43. By understanding and knowing the cost of capital, Marriott is able to select relevant investment projects for the company, determine incentive compensation, and repurchase undervalued shares when needed. Thus, students mostly avoid doing assignments till they think that they are out of time and need to submit it. Shareholders think that their money would have been vanished due to the same structure.
The weighted 2868 words - 12 pages Report on Capital Structure and the Cost of Capital of AstraZeneca Plc and British American Tobacco Plc. Due to their model of managing rather than owning hotels they have managed to increase their Shareholder Equity and see growth in their organization. To do this we use comparable companies for each division; this is because we cannot run regressions at the divisional level as that information is not available. Marriott Corporation The Cost Of Capital Case Study Analysis 1. Invest in projects that increase shareholder value: Marriott uses discounted cash flow techniques to evaluate potential investments.
In each of these areas our goal is to be the preferred employer, the preferred provider, and the most profitable company. Please place the order on the website to order your own originally done case solution. Management fees typically equalled 3% of revenues plus 20% of the profits before depreciation and debt service. The components of this financial strategy are 1 manage rather than own hotels; 2 invest in projects that increase shareholder value; 3 optimize the use of debt in the capital structure; and 4 repurchase undervalued stock. Low debt ratio might not be efficient for the big companies who are likely to accomplish something new in the market.
Strategy enables confidence in future performance. Marriott has defined a clear financial strategy containing four elements. The risk premium for the restaurant division is 8. In example, a project related with branding that will increase Marriott overall reputation and value 5 If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company overtime? Based on the information in the case, prepare a projected cash budget for the four months September through December 1979, a projected income statement for the same period, and a pro forma balance sheet as of December 31, 1979. Marriott Corporation: The Cost of Capital Abridged. A gap between warranted value and market price, therefore, usually triggered repurchases instead of a revision in the warranted value by, for example, revising the hurdle rate.
In 1987, Marriott repurchased 13. In addition, to selecting profitable investments, Marriott Corporation has done a lot to show shareholders that they are a priority. Eckwood have, and what are their pros and cons? The case explores the rationale for the acquisition and its evaluation, including the reasonableness of the financial model and its sensitivity to alternative assumptions. For the purpose of determining the period to be compared for risk free return and risk premium, investment life of the project should be considered. In the case is stated that Marriott required three inputs to determine the opportunity cost of capital: debt capacity, debt cost, and equity cost consistent with the amount of debt. Marriott would like to be the preferred employer, the preferred provider and the most profitable company in each of the operating areas.