November 3, 2010

ASICS 401
Marriott Corporation
Case Analysis
Ben Alexander Terra Collette
Natalia Martinez Eric Schneck


1. Marriott Corporation uses its cost of capital estimate to: evaluate assets for
purchase, compare projects to undertake, effectively use debt in their capital
structure, and know when to reacquire outstanding shares. Knowing the
companies WACC is important. This is used to compare your company
against your competitors as well as the government. If Marriott has a low
WACC, they can grow easily with minimum cost. The WACC is the
appropriate amount that the company requires from new projects or other
investments that they can undertake.

2. Marriott Corporations weighted average cost of capital is 15.03 %( see
Exhibit 1). This cost of capital measures all Marriott divisions, which includes
hotels, restaurants, and services. For example, if Marriott were to buy out a
competitor with similar divisions, this cost of capital would be an
appropriate measure. However, a more accurate estimate for new projects,
such as opening a new hotel, would be to apply a specific cost of capital for
that particular division.


3. If Marriott were to use a single hurdle rate for all of its investment decisions,
overall the company would not be allocating their resources appropriately.
By using a single rate, Marriott would undertake less efficient projects and
reject profitable projects. For example, restaurants may promise high returns
but if we do not take into account business risk, we might open up too many
restaurants. On the other side, because a service contract may not provide
high returns we will refuse these projects when in reality they may be more
profitable. By using one single rate, Marriott would not be taking into
account business risk. Investors may not be willing to lend at assumed rates.
This will be a problem for Marriott when they attempt to raise capital.

4. The WACC of the lodging division is 19.26% (see Exhibit 2).


5. The WACC of the restaurant division is 11.3% (see Exhibit 3).

6.
1. Manage rather than own hotel assets
Marriott is doing well in this aspect of their company. They have $6.5
billion of sales for $5.4 Billion in assets. The asset turnover is 1.21.
2. Invest in projects that increase shareholder value
They are investing heavily every year in new projects, and still
wielding a 22% ROE.
3. Optimize the use of debt in the capital structure
With A-rated unsecured debt, using debt to finance their operations
creates a higher ROE. Marriott uses a target interest coverage rate,
which is currently 5.41, instead of having a target debt-to-equity ratio.
4. Repurchase undervalued shares
When the stock price decreases, they will buy back shares. However,
the stock price continues to increase so they may not be repurchasing
as much. However, in 1987 Marriott repurchased 13.6 million shares
for $429 million.

Marriotts financial strategy coincides with their growth objective. As
compared to their competitors, Marriott outperforms them in the restaurant
and hotel industry. They have revenue of $6.52 billion, which is only closely
followed by McDonalds at $4.89 billion. Marriotts sales increased by 24% in
1987 and boasts a 22% ROE. They continue to increase the amount of assets
they hold but can issue debt at an extremely low rate, which is 1.3% over
treasury bonds.