Essay on Hbs Case “Marriott Corporation: the Cost of Capital”

1454 Words Mar 22nd, 2013 6 Pages
Marriott Corporation:

Questions for HBS case “Marriott Corporation: The cost of capital”

1) Are the four components of Marriott's financial strategy consistent with its growth objective?

In my opinion, the four components of Marriott's financial strategy are consistent with its growth objective.
As we find in the case, the four components of Marriott's financial strategy: Manage rather than own hotel assets, Invest in projects that increase shareholder value, Optimize the use of debt in the capital structure, and Repurchase undervalued shares; are aligned with the growth objective. Marriott wants to remain a premier growth company. This means aggressively developing appropriate opportunities within our chosen lines of
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Hotels Return Eq. Beta Leverage Revenues Asset Beta
HILTON HOTELS CORPORATION 13.3 0.76 14% 0.77 0.697
HOLIDAY CORPORATION 28.8 1.35 79% 1.66 0.435
LA QUINTA MOTOR INNS -6.4 0.89 69% 0.17 0.397
RAMADA INNS, INC. 11.7 1.36 65% 0.75 0.667 Average 0.549

Restaurants Return Eq. Beta Leverage Revenues Asset Beta
CHURCH’S FRIED CHICKEN -3.2 1.45 4% 0.39 1.417
COLLINS FOODS INTERNATIONAL 20.3 1.45 10% 0.57 1.365
FRISCH’S RESTAURANTS 56.9 0.57 6% 0.14 0.550
LUBY’S CAFETERIAS (Operates cafeterias.) 15.1 0.76 1% 0.23 0.756
McDONALD’S 22.5 0.94 23% 4.89 0.805
WENDY’S INTERNA TIONAL 4.6 1.32 21% 1.05 1.149 Average 1.007

Lodging Restaurant
D/V 50.0% 75.0%
E/V 50.0% 25.0%
Tc 44% 44% Kd 10.05% 8.70%
Rf 8.95% 6.90%
Rprem 1.10% 1.80% Ke 15.31% 29.74%
Eq.Beta 0.856 2.696
Asset Beta 0.549 1.007
Rf 8.95% 6.90%
EMRP 7.43% 8.47% Sales % from total 41.00% 13.00% WACC 10.46% 11.08%

a) What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?

Risk free rate Lodging division
• 30 years Maturity U.S. Government Interest Rate (8.95%)
• Is a long-term investment

Risk Premium Lodging division
• Spread between S&P 500 Composite returns and long-term U.S. government bond returns between 1926-87 (7.43%)
• Is a long term investment
Risk free rate

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