Started in 1927 as a simple beverage stand in Washington D.C., Marriott Corporation has grown into a leading company in the lodging and food service industry in the United States. With its three (major) business involvements, lodging/hotel development and operating, contract-based food service and restaurant operations, the Marriott Corporation has an extensive portfolio of assets, generating a whopping $223M profits of a $6.5B revenue in 1987. Weighted share for each branch expressed in appendix A.Aligned with financial theory, spreading your investments across several industries is a tool for minimizing your unsystematic risk. However, this also raises some complications regarding the accuracy of its financial calculations. More specifically, if the corporation is able to make good decisions about investment options and risk management associated with said investments when it operates in such large variety of industries. Marriott is aware of the potential skewing in its projected numbers, and have taken certain steps to combat this. Most notably, when calculating the cost of capital and debt, they chose to view each division as an independent company, in additional to the mother company. However, Mr. Dan Cohrs, VC of project finance, has expressed some concerns regarding the company’s financial management, and its effect on the accuracy on the financial results, Before addressing the problems stated above, it is important to understand them in the contexts of their financial strategy. Marriott Corporation lists 4 strategies related to financial management- Manage rather than own hotel assets- Invest in projects that increase shareholder value- Optimize the use of debt in the capital structure- Repurchase undervalued sharesThe first one is a common partnership structure, designed to share risk with willing participants. Marriott conducts market research, develop plans and evaluates the financials, and when completed, sells the assets while retaining operating control. The last move separates them from usual real estate developers, and allows them to negotiate ownership over some of the cash flows (usually around 3% of revenue and 20% of profits). The second one is not a controversial one, as firms task of increasing shareholder value is widely considered a pillar stone in the financial world[1]. As investments comes with uncertainty, the accuracy of the hurdle rate used is crucial to whether projections will come true. Here lies a key component in the initial problem, as hurdle rates is based on a wide variance of factors. When operating in different industries, the factors will be different, so Marriott will have to adjust accordingly.The third one regarding debt structure is also a crucial part of the financial decision making. Marriott favors the use of interest coverage ratio (ICR) over debt/equity ratios, meaning that the interest lies in their ability to service their debt, rather than trying to strive for a targer capital structuring.Lastly, their open market strategy involves active participation in the movement of its public stocks. By regularly calculating what they saw to be the “true” value of their shares, they vowed to repurchasing shares if the markets perceived value of the stock (i.e. …) drops substantially below their perceived “real” price. They would by this act as arbitragers, profiting from what they saw as market inefficiency. They would always favor this strategy over revaluing their calculations, which relates to the initial problem.Returning to Mr. Cohrs’ concerns, we aim to assist Marriott Corporation in calculating an accurate discount rate, more specifically the weighted average cost of capital (WACC). The WACC is a financial tool which calculates the cost of capital, weighing it proportionally for its sources of capital (equity and debt). This functions as an opportunity cost of investments with similar risk, and is crucial in every financial valuation. This will be done for the corporation and its three divisions, aligned with the intended concerns. Appendix B goes more in depth of WACC.Appendixes:Appendix A: Marriot Corporation Revenue Profit Lodging 41% 51% Food service 46% 33% Restaurants 13% 15% Total 100% – 100% – Appendix B:where r_e and r_d are the cost of equity and debt, respectively. While r_d is usually the interest rate on the relevant debt, adjusted for corporate tax rate due to tax deduction, r_e can be calculated in a variety of ways, based on the information available and the intended use. Examples areE, D and V is equity, debt and value respectively. While Equity is usually calculated with market values (P/S * Number of shares), debt is often calculated using book values from the spread sheet (Long term debt + Current portion of long term debt). Value is their combined value, hence the weighing in the WACC formula.[1] “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine.”– Milton Friedman

Back To Top