Kemudian Cohrs of Marriott Corporation has the important task of determining right hurdle costs for the entire organization as well as every person business segment. These costs are a key component in determining which future projects to pursue and therefore fundamentally very important to Marriott’s progress trajectory. The case analysis looks for to examine Marriott’s financial strategy in comparison with it is growth desired goals as well as assess a detailed break down of Marriott’s cost of capital ” the two divisionally and since a whole. Financial Strategy and Growth
Marriot’s current economic strategy is line having its overall goal of stable growth.
By building and then promptly selling all their hotels to limited partners, the company recoups its costs almost instantly. They then manage the accommodations, taking a 20% cut from the profits in addition to a 3% managing fee. This kind of results in quickly, stable returns, which is best for continued progress. They may run into issues with overexpansion in the future, however for the time being, their very own strategy is usually sound.
The other components of Marriott’s economical strategy are also in line with their overall desired goals. By in search of projects that could increase aktionär value and repurchasing undervalued shares, they will ensure that the significance of their collateral does not lower. When coupled with the use of financial debt in the provider’s capital framework, they are building a good structure for long term growth.
Expense of Capital ” Lodging and Restaurant Partitions
We begin with a great analysis of hurdle rates for the Lodging and Restaurant sections, for which public comparable company figures are supplied, to into cost of capital for Agreement Services within the next section, for which public comparables are not obtainable.
Restaurant D/V D/E Î²lev ered Î²unlev ered
Church’s Chicken breast 4. zero % zero. 04 0. 75 0. 73
Frisch’s 6th. 0 % 0. 06 0. 60 0. 58
Collins Foods 12. 0 % 0. eleven 0. 13 0. 12
Luby’s Cafeterias 1 ) 0 % 0. 01 0. sixty four 0. sixty four
McDonald’s 23. zero % zero. 30 1 . 00 zero. 86
Wendy’s Int. 21. zero % zero. 27 1 ) 08 zero. 94
Rf almost eight. 72 %
Industry Premium several. 92 %
Typical Î²unlev ered 0. 685
Focus on Debt % 42 %
Î²lev ered 0. 962
Cost of Collateral 16. 57 %
Cost of Debt 10. 52 %
WACC doze. 08 %
Places to stay D/V D/E Î²lev ered Î²unlev ered
Hilton 14. 0 % zero. 16 zero. 88 zero. 81
Holiday 79. 0 % 3. 76 1 . 46 0. forty seven
La Quinta 69. 0 % 2 . twenty-three 0. 38 0. 18
Ramada 65. zero % 1 . 86 0. 95 0. 47
Rf 8. 95 %
Industry Premium several. 92 %
Median Î²unlev ered 0. 468
Concentrate on Debt % 74 %
Î²lev ered 1 ) 213
Cost of Equity 18. 56 %
Cost of Debts 10. 05 %
WACC almost eight. 98 %
For anyone two categories, we located the unlevered beta for each company in the division’s peer set, then relevered the median with this set regarding Marriott’s target debt percentage of 74% and 42% for Hotels and Cafe divisions, respectively, as a web proxy for Marriott’s Lodging levered beta. The risk-free prices are based on U. S Treasury interest rates: all of us used the 30-year pertaining to Lodging and the 10-year for Restaurant as a result of longevity from the assets in each individual division. Places to stay assets comprise mostly of real estate and possess lives spanning decades, while restaurants are more likely to have a life pattern closer to a decade. The geometric average in 1987 for the propagate between the S&P 500 and U. S. Government Bonds for 7. 92%
is utilized as the industry risk premium in all circumstances, and the cost of debt is usually calculated by adding the debt charge premium for each and every division with each division’s risk-free rate. A tax charge of 44. 1% is definitely extrapolated by simply dividing tax expense by EBT inside the historical financials.
With the complete infrastructure in place, we can estimate each division’s cost of value through the CAPM model:
Cost of Capital ” Contract Services Division
Similar companies are certainly not given intended for the Deal Services Department, but advice about the division could be backsolved employing some simple algebra even as are given Marriott’s balance sheet break down by segment in Exhibit 2:
Since it is given that Marriott’s unlevered beta can be. 97, its tax rate is 44. 1%, and has 60% debt in its capital composition, we can unlever to see that Marriott as an entire organization has an unlevered beta of. 79. Let’s assume that Marriott’s unlevered beta can be calculated as a weighted normal of its divisions’ betas based on identifiable assets, we are able to find Agreement Services unlevered beta by solving: Applying some algebra, this brings an unlevered beta of 1. 55 intended for Contract Services. Relevering with the 2/3 desired debt-to-equity rate yields a levered beta of 2. 13. This time, all of us use the 1-day risk-free rate due to the actually shorter lifespan of deals.
Cost of Capital ” Marriott as a Whole
There are several approaches to approach Marriott’s cost of capital as an entire firm. One way is to use CAPM to find the expense of value, long-term interest rates for the price of debt, and weigh relating to the capital composition to find WACC. Under this method, we handle the previously found firm-wide Î²U of. 79 towards the desired 3/2 debt-to-equity ratio to find a cost of equity of 17. 12%. Next, all of us apply the CAPM making use of the 10-year Treasury for 1987 Assets % of total Î²unlev ered
Lodging 2777. 4 sixty. 6 % 0. 47
Deal Services 1237. 7 twenty seven. 0 %
Eating places 567. 6th 12. 4 % 0. 68
Total 4582. 7 95. 0 %
Rf 6. 90 %
Industry Premium 7. 92 %
Î²unlev ered 1 ) 550
Target Debts % 40 %
Î²lev ered 2 . 131
Expense of Equity twenty-three. 78 %
Expense of Debt eight. 30 %
WACC 18. 12 %
the risk-free price and the one-year arithmetic return for 1987. We use the arithmetic rather than geometric as CAPM can be described as one-period model. For Marriott’s cost of debt, we put the credit spread of 1. 3% towards the ten-year Treasury yield of 8. 72%. Plugging each one of these variables in CAPM, all of us arrive at a WACC of 10. 53%. Another method to finding Marriott’s cost of capital is by going for a weighted normal of its three sectors. Since its 3 segments have different business models ” it may be helpful to start to see the cost of capital as a mixture of its 3 divisions rather than an mixture Marriott product. Weighing each division by the same weight loads in the Contract Services section, we compute that WACC is 11. 3% A couple of items to be aware on Marriott’s firm-wide cost of capital are noted here. Marriott’s WACC measures the price tag on capital for the whole Marriott Firm. Marriott provides three lines of organization “each line of service features its unique cost of debt and beta, so when valuing investments in these three support lines, we would use their own WACC rather than using Marriott’s WACC. In the event the firm simply uses one hurdle charge for assessing investment possibilities in every line of business, it might accept or reject some investment task improperly. In the question below we already found that the WACC to get lodging and restaurants is usually not the same. So for example , in the event just using 1 hurdle rate, like 10%, to evaluate the project between these two type of service, the lodging services may decline this task while the cafe service may well accept this. Appendix
Below are the costs of equity, debt, and capital for all of Marriott as well as the three divisions. Weight WACC
Hotels 0. 60606 8. 98 %
Contract Providers 0. 27008 16. 12 %
Restaurants 0. 12386 12. 08 %
eleven. 30 %
Marriott Hotels Restaurant Services
Cost of Debt twelve. 02 % 10. 05 % 15. 52 % 8. 30 %
Expense of Equity 18. 12 % 18. 56 % 18. 57 % 23. 78 %
Cost of Capital 10. 53 % 8. 98 % 12. 08 % 16. 12 %
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