Essay About Marriott Corporation And J. Willard Marriott

Marriott Corporation – Wacc Analysis and Estimation
Marriott CorporationWACC Analysis and Estimation26th November 2015Team MembersExecutive Summary[pic 1]J. Willard Marriott founded Marriott Corp in 1927 with a root beer stand, later growing it into a leading lodging and food service company with sales of over $6.5bn by 1987. It has three main divisions: lodging (41% of Sales), contract services (46%) and restaurants (13%). The company focused on four strategic goals: managing hotel assets and not owning, investing in projects to increase shareholder value, optimizing the use of debt, and repurchase of undervalued shares. Marriott Corp relied on measuring its investment cost of capital by using Weighted Average Cost of Capital (WACC). As per the management team, the divisional hurdle rates would have a key impact on the future financial and operating strategies. It intended to continue growing at a fast pace by relying on the best opportunities arising from their divisions. Also, to make the divisional managers more involved in its financial strategies, company also planned to use hurdle rates to determine the incentive compensations. Case AssumptionsAnnual tax rate remains the same, since the current year as per the case in 1987, we have taken 1987 PBT and Income Tax amount to calculate Tax RateTaken Arithmetic Average between 1926-87 ( Exhibit 5) 7.43% for Long term Risk Premium (Market risk – Risk Free rate) and 1926-87 average of 8.47% for Short TermFor Restaurant and Contract Services divisions, we have taken US Treasury 1yr short term rate and for Lodging and Marriott Overall we have taken US Treasury 30yr long term rate Assumed US Government interest rates in 1987 to be same as in 1988Marriott Corporation OverviewFinancial Overview[pic 2]In the last 10 years, Sales have increased with a CAGR of 21%, EBIT by 18% and Net Income by 17%Increasing trend of Debt-Equity Ratio in last 10 years, indicating the overuse of debt to finance the growth (More Risky)The growth in sales has also helped the shareholders as there has been an increase in EPS from $0.78 in 1983 to $1.67 in 1987Segmental AnalysisOperating margin has almost been constant in the last 5 years (Lodging 10%, Restaurants 10% and Contract Services 7%)High Asset turnover Ratio shows that the divisions are performing well and that it is generating more revenue per dollar of assets. Capital Expenditure has grown more in Lodging and Contract Services divisions in last 5 years, indicating that the company is more focused on increasing its fixed assets to boost growth/expansion processQ2) What would be the effect if Marriott systematically underestimated or overestimated its cost of capital?If Marriott systematically underestimated the cost of capital, chances are that it might accept riskier projects, which it would reject from an appropriate hurdle rate. This may cause some huge risks for the company, as it would be exposed to risky projects. If Marriott continuously overestimated its cost of capital, it would be prone to reject some good projects with better returns in the same risk level. Missing the chances like these might result in loosing potential profitable investment opportunities and falling behind to its competitors.