Essay About Financial Strategiesmarriott’S Financial Strategies And Use Of Debt

Business Analysis of Marriott Corporation
Business Analysis of Marriott CorporationPrepared by Austin Kane7 November 2016Fin 423-01Preview of Concerns and FindingsMarriott Corporation was founded in 1927 as a root beer stand, and over the next 60 years grew into one of the leading lodging and food service companies in the United States. Marriott is separated into three divisions, operating primarily in the lodging industry, contract services, and restaurants. It’s important that in order for the company to utilize the best investment strategy, we find individual WACC’s for each separate division of the company. Using a single WACC across the board might skew the projections for projects that are in different divisions of the company. In order to accurately calculate the WACC for each division we had to find the appropriate tax rate, beta, and market premium. The WACC for Marriott as a whole was 9.22%, for the Lodging division it was 7.81%, for the Contract Services division it was 9.60%, and for the Restaurant division it was 9.67%. Financial strategiesMarriott’s financial strategies include the following:Manage rather than own hotel assetsInvest in projects that increase shareholder valueOptimize the use of debt in the capital structureRepurchase undervalued sharesCalculationsBefore starting the calculations for the WACC, there were other calculations that needed to be computed first, such as the cost of equity and the cost of debt among other things. The market risk was calculated by taking the geometric mean of the yearly returns from 1981-1987. Rm came out to be 13.83%. For the risk free rate we used the 10yr US Government Bond Interest rate at 8.72% for Marriott and Lodging, while using the 1yr US Government bond rate at 6.90% for Contract Services and Lodging. Taking the given levered beta of .97, we found the unlevered beta and then re-levered the betas appropriately for each division. These more detailed calculations can be found in the appendix at the end of this report. The corporate tax rate we used was 44.1%.After finding the cost of equity, we found the cost of debt using the following calculation:Marriott Cost of DebtType of BondGovernment RatesA-Rated PremiunMarriotts A-Rated Bond RatesDebt % in CapitalCost of DebtFixed8.72%1.30%10.02%60%6.01%Floating6.90%1.30%8.20%40%3.28%     9.29%*The above cost of debt is adjusted for each different division**These calculations are found in the appendixWACC for Marriott CorporationMarriott Weight-Average Cost of CapitalWACC=Wd*Rd*(1-Tax)+We*Re9.22%=60%*9.29%*1-44.10%+40%*15.26%