Marriot Case Analysis

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MARRIOTT Case Analysis

1. Are the four components of Marriott’s financial strategy consistent with its growth objective?
Manage rather than own hotel assets – Although this strategy has a risk of contract expiration it makes easier to expand.
Invest in projects that increase shareholder value – This component definitely stimulates growth, although may force management to take more risk.
Optimize the use of debt in the capital structure – The concept of optimal capital structure stands for the growth, nevertheless the techniques used by management sometimes limit it in favour for the higher rating.
Repurchase undervalued shares – In a number of cases this component may lead to directing the cash flows not in the projects with positive NPV, which may impede growth.

2. How does Marriott use its estimate of its cost of capital? Does this make sense?
Marriott used (or considered to use) the estimate for the cost of capital in two ways: a) Discounted CFs from projects by the appropriate division’s hurdle rate to get NPV, which makes a lot of sense since the risk among divisions varies. b) Thought about incorporating hurdle rate in compensation policy – this doesn’t make much sense, because the rate reflects the risk of activities, not the performance of managers.

3. Compute the WACC of Marriott Corporation:
a. What risk-free rate and the risk premium did you use to calculate the cost of equity?
To be consistent with risk premium calculations I used the arithmetic average (best estimator) of historic LT US Government Bonds (4.58%) for the longest period because of the most precise estimate (unfortunately, ignoring possible structural change).
As a risk premium I used the 7.43% (Spread between S&P Index and LT US Government Bonds), although it’s relatively high, my comparably low risk free rate will compensate for that.
Then to calculate the…...

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