Marriott Corporation Case Study

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Register to read the introduction… Profit rate for a hotel is its net present value divided by its cost.

Company Background
Marriott Corporation began in 1927 with J. Willard Marriott's root beer stand. Over the next 60 years, the business grew into one of the leading lodging and food service companies in the United States. Marriott's 1987 profits were $223 million on sales of $6.5 billion. See Exhibit 1 for a summary of Marriott's financial history. Marriott had three major lines of business: lodging, contract services, and restaurants. Exhibit 2 summarizes its line-of-business data. Lodging operations included 361 hotels, with more than 100,000 rooms in total. Hotels ranged from the full-service, high-quality Marriott hotels and suites to the moderately priced Fairfield Inn. Lodging generated 41% of 1987 sales and 51% of profits. Contract services provided food and services management to health care and educational institutions and corporations. It also provided airline catering and airline services through its Marriott In-Flite Services and Host International operations. Contract services generated 46% of 1987 sales and 33% of profits. Marriott's restaurants included Bob's Big Boy, Roy Rogers, and Hot Shoppes. Restaurants provided 13% of 1987 sales and 16% of
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government bonds, and high-grade, long-term corporate bonds. Mr. Cohrs was concerned about the correct time interval to measure these averages, especially given the high returns and volatility of the bond markets shown in Exhibits 4 and 5. He was concerned also about which measure of expected returns should be used. Exhibits 4 and 5 present two different measures of average annual return, the arithmetic and the geometric. The arithmetic average return is the sum of the annual returns over the time period divided by the number of years in the time interval. The geometric average return is the compound average growth rate over the time interval. For example, if the return for a security were - 10% in period I and 30% in period 2, the two averages would be Arithmetic average : Geometric average …show more content…
10

Marriott Corporation: The Cost of Capital

298-101

Exhibit 5

Spreads between S&P 500 Composite Returns and Bond Rates, 1926-1987

Arithmetic Average

Geometric Average

Standard Deviation

Spread between S&P 500 Composite Returns and Short-Term Treasury Bill Returns
1926-1987 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 8.47% 9.89 8.20 7.01 5.17 21.31 -.23 6.42% 6.68 6.60 6.18 4.41 12.31 -.23 20.60% 27.18 13.71 14.60 14.15 17.92 30.61

Spread between S&P 500 Composite Returns and Long-Term U.S. Government Bond Returns
1926-1987 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 7.43% 6.76 9.48 12.86 -2.36 -5.97 7.92 5.63% 3.64 8.04 12.26 -2.11 -5.97 7.92 20.78% 26.94 14.35 15.58 13.70 14.76 35.35

Spread between S&P 500 Composite Returns and Long-Term, High-Grade Corporate Bond Returns
1926-1987 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987
Source:

6.77% 6.08 8.82 12.11 -3.47 -1.38 5.50

4.97% 2.92 7.40 11.56 -3.12 -1.38 5.50

20.31% 26.70 13.15 15.84 13.59 14.72 34.06

Casewriter’s estimates based on data from the University of Chicago’s Center for Research in Security Prices.

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