Each of these facets of the fiscal scheme support Marriott’s growing aim. except for the repurchasing of undervalued portions. which is non based on feeling of important undervaluing of the stock by the market. but based on an internally generated intrinsic value of the company.

Marriott’s cost of capital appraisal procedure involves consideration of debt capacity. cost of debt and cost of equity. This information. plus consideration of capital construction and effectual revenue enhancement rate. is so applied to the Capital Asset Pricing Model. utilizing the U. S. Government 10-year bond as the riskless rate and the spread between the S & A ; P 500 complex and the U. S. Government 10-year bond rate. Beta is based on the last five old ages of monthly return informations. The ensuing corporate WACC is 10. 22 % .

However. new investings in the different divisions requires the application of a hurdle rate that reflects the concern hazard of that peculiar unit. instead than the overall corporate hurdle rate. which is chiefly applicable to corporate capital outgos. such as central offices and IT support systems. The tabular array below summarizes the WACC for each Marriott division based on its mix fixed and drifting rate debt. capital construction. and applicable unlevered beta for its industry.

Introduction
Marriott Corporation is diversified company in the housing. eating house and contract services. Its lodging concern unit consisted of pull offing the operation of 361 hotels of a assortment of star evaluations. Its eating house concern unit ran and owned a smattering of fast nutrient and diner ironss. One of the perennial challenges that Marriott direction faced was the close integrating of its fiscal scheme. growing aims. finding the appropriate hurdle rate for investings. and how to add a capital cost constituent to incentive compensation programs.

Marriott’s Financial Strategy
The overall aim for Marriott’s frailty president of undertaking finance. Dan Cohrs. was to back up the company’s growing objective in being the most profitable company in its lines of concern. To back up this growing aim. Marriott developed a fiscal scheme that consisted of four tactics – manage instead than ain hotel assets. put in undertakings that increase stockholder value. optimise the usage of debt in the capital construction. and repurchase undervalued portions.

Manage Rather than Own Hotel Assets Marriott would develop hotel belongingss and so sell them off to investing partnerships. Its typical trade would dwell of it being granted a long-run contract to run and pull off the belongings on behalf of the proprietor. where it receives 3 % of grosss as compensation and 20 % of net income over and above a specified return for the proprietor.

If you wanted to maximise growing and stockholder value. this was a more prudent attack to being in the housing concern because the company wouldn’t be held down by big sum of debt associated with these belongingss and it eliminated a batch of long-run market hazard. If a hotel went under. Marriott’s hazard was limited to the part of debt that it guaranteed alternatively of the full sum. Therefore. this tactic supported the company’s growing objective because it did non bind up immense sums of investing capital in fixed assets and allowed it to concentrate on activities and undertakings that could bring forth important gross growing. If Marriott could do a hotel really busy. it merely had to do little additions in staff to suit big additions in concern. Plus. its profitableness would speed up once it was able to unclutter its belongings owner’s return demand. By being service oriented. Marriott greatly reduced the capital strength of its lodging concern unit.

Invest in Projects That Increase Shareholder Value Technically talking. this is a tactic espoused by every company. Marriott purposed to merely put in NPV positive undertakings based on the hurdle rate appropriate for the type of investing. The pro forma hard currency flows for investing chances were developed at the division degree utilizing corporate templets. This provided consistence in methodological analysis while leting for fluctuation in unit specific premises. This will besides back up the company’s growing objective because it promotes Marriott acquiring the best consequences for its investing financess to maximise the value created

by the undertakings it invests in. It besides means that undertakings in riskier countries have to be that much profitable to bring forth the NPV to do an investing
competitory versus alternate investings in less hazardous units.

Optimize the Use of Debt in the Capital Structure Marriott used a targeted involvement coverage ratio to find its optimum usage of debt alternatively of a debt-to-equity ratio. Because this attack bases debt capacity chiefly on fiscal operations alternatively of market capitalisation. it is supportive of growing by restricting debt based on close term fiscal public presentation instead than the ups and downs of the capital markets.

Repurchase Undervalued Shares
Marriott calculated its ain rating of its stock called its warranted equity value. Whenever its stock monetary value went below the warranted value. Marriott would purchase back stock. This maneuver does non back up growing because Marriott is utilizing an intrinsic value of its stock to supplant the market value of the stock. which is the best index of the value of a publically traded company. The company besides assumed that this was the best usage of hard currency and debt than investings. Although companies have used debt to buy back stock. it is normally to seek to “game” the system and better the profitableness related fiscal ratios by cut downing the sum of entire equity and the figure of portions outstanding.

Three more legitimate grounds for Marriott to purchase back its stock would be extenuate the impact of stock dilution due to the exercising of stock options used as incentive compensation ; to pay out extra financess to stockholders without the revenue enhancement punishment associated with dividends ; or to cheaply take stock when the market it merchandising it at a steep price reduction to historical tendencies when the company is executing good. Buying back stock when it falls a little sum below an intrinsic value does non lend to growing and those financess could hold likely been used in a profitable. value-increasing undertaking.

Marriott’s Cost of Capital Estimation Process Marriott uses the leaden mean cost of capital ( WACC ) to find its corporate hurdle rate. every bit good as estimation the hurdle rates for its different divisions. The procedure begins with the company finding its debt capacity. cost of debt and its cost of equity. besides being a map of the sum of debt. After finding the corporate degree cost of debt. it allocated a part of that debt to each of the concern units to ease their unit hurdle rates.

Each unit had a different debt weighting and cost of debt. Marriott yearly updated its cost of capital for doing investings. It does do sense for Marriott to find a hurdle rate for its different concern units because it is a diversified company. even if it is related variegation. Its concern units carry the concern hazard of the industries they inhabit. regardless of the corporate make up of Marriott. To do the best usage of Marriott financess and maximise value. Marriott has to take into history the hazard associated with each unit’s undertakings. Having a hurdle rate for each concern unit eliminates prejudices in undertaking choice that would happen if it used the corporate hurdle rate.

Marriott’s Corporate Weighted Average Cost of Capital
In its usage of the leaden mean cost of capital ( WACC ) expression below. Marriott uses its long-run debt to entire capital ratio ( entire capital = entire assets – current liabilities ) for its debt weighting.

Cost of Equity
To find the cost of equity. Marriott used the Capital Asset Pricing Model ( CAPM ) . which relates the returns for a individual stock against the extra returns for the market over the riskless rate. Marriott has a mark debt per centum in capital of 60 % for the company. Its 1987 debt per centum is 58. 8 % for which a beta of 1. 11 was calculated based on the past five old ages of monthly returns. The mean corporate revenue enhancement rate for the past five old ages is 43. 7 % . The mark debt per centum in capital is 60 % and is treated as the debt-to-value ratio. For the mark per centum the beta must be unlevered and so relevered based on the equation below.

This produces a relevered beta of 1. 135. The market hazard premium is based off of the spread between the S & A ; P 500 composite returns and long-run U. S. authorities bond returns of 7. 92 % . The riskless rate is 8. 72 % based on the 10-year U. S. authorities bond adulthood rate. Using the CAPM equation below. this produces a cost of equity of 17. 71 % .

Cost of Debt
Marriott has fixed and drifting debt. Its jutting mix will be 60 % fixed debt and 40 % drifting debt. Overall. Marriott has estimated that its debt hazard premium is about 1. 30 % above U. S. authorities debt securities. Fixed rate corporate debt is traveling to be consistent with 10-year adulthood U. S. authorities debt and the drifting rate debt is traveling to be consistent with 1-year adulthood U. S. authorities debt. The 30year debt is non applicable because Marriott manages instead than owns the hotel belongingss it manages. The ensuing leaden cost of debt is 9. 29 % . Debt Type

Corporate or Firm Level WACC
By using Marriott’s corporate cost of debt and cost of equity from the old subdivisions. we calculate a WACC of 10. 22 % .

Which Investments Can the Corporate Hurdle Rate by Applied To? The corporate or steadfast degree hurdle rate can non be applied to all undertakings because of the prejudice it presents when concern units have less or more hazard than the company as a whole. However. there are investings to which the corporate hurdle rate would be applicable. That would affect any capital outgos on behalf of the corporate parent. including edifices. every bit good as endeavor resource systems and any other support systems that serve all three concern units.

For illustration. the three concern units should be utilizing the same system to make fiscal coverage and accounting. If Marriott merely used the corporate hurdle rate for all investings. in the long-run. it would make ill because the rate would do the company to put in undertakings that are excessively hazardous and avoid undertakings that could increase company value. Basically. Marriott would be worth a batch less than it otherwise would hold if it didn’t take a one-size-fits-all attack to its hurdle rate for different undertakings in the concern units. Or worse. it could travel out of concern or be acquired by a rival that had a more rational attack to its undertaking choice procedure and was able to purchase Marriott with the value it had created. Cost of Capital for Individual Divisions

The procedure that Marriott employs to find the corporate hurdle rate can besides be applied to its different divisions. For the housing and eating house
divisions. the cost of equity can be determined by utilizing the leaden norm unlevered beta for a group of equal companies and so relevering the beta for that division’s purchase fortunes. Contract services will necessitate a residuary attack for finding its cost of capital. Peer groups were used to cipher leaden norm unlevered betas for the groups. utilizing 46 % as the highest fringy corporate revenue enhancement rate for the financial twelvemonth ended June 30. 1987. For the housing and eating house divisions. the same riskless rate and market hazard premium was used.

Although both divisions own durable assets. they are closer to 10-year versus 30-year assets. other than any installations owned. As for the housing and eating house belongingss. the majority of the capital investing is made in redevelopment. updating or overhauling hotel belongingss and updating of the eating houses. For illustration. Marriott will sporadically update the furniture. decor. colour and comfortss at the belongingss it manages to maintain them competitory. This is a regular portion of the concern. so durable assets in those belongingss would be replaced anyhow. This even occurs in eating houses. although less often. Contract services would besides run its durable assets in the same clip frame.

To find the cost of equity for the lodging division. a group of equal companies were gathered and cardinal informations related to capital construction. gross and beta was compiled to cipher a leaden norm unlevered beta for the group. That beta was relevered based on the housing divisions projected debt per centum in capital of 74 % as the debt-to-value ratio for the operating unit. ensuing in a cost of equity of 20. 13 %

To find the cost of equity for the eating house division. a group of equal companies were gathered and cardinal informations related to capital construction. gross and beta was compiled to cipher a leaden norm unlevered beta for the group. That beta was relevered based on the housing divisions projected debt per centum in capital of 42 % as the debt-to-value ratio for the operating unit. ensuing in a cost of equity of 19. 08 %

With the cost of debt and cost of equity relation to its industry. the eating house division cost of capital is equal to 13. 45 % .
Contract Services Division
To cipher the cost of capital for the contract services is more complex because there aren’t any publically traded equal companies to compare against and in private held houses either do non describe their consequences or do non describe consequences compliant with the fiscal coverage demands of publically traded companies.

Based on the jutting mix of fixed and drifting debt. the cost of debt for the contract services division is estimated at 10. 07 %

A residuary attack will be required to find the cost of equity for the contract services division harmonizing to the expression below utilizing the unlevered betas. weighted by identifiable assets. Solving the expression for ?C will supply us with the last piece of information needed to cipher its cost of capital.

This consequences in an unlevered beta of 0. 610. Based on the jutting capital construction of the division. it levers to a round of 0. 839.

With the cost of debt and cost of equity applicable to this concern unit. the contract services division cost of capital is equal to 11. 33 % . Decision
There are already many premises made in a traditional cost of capital computation for a single-industry company. When a company is diversified. like Marriott. it can non utilize a individual corporate cost of capital for doing investing determinations. It must do determinations for each division harmonizing to the concern hazard faced by that concern unit because the degree of hazard varies from industry and that must be accounted for. Otherwise. a house will prosecute in colored decision-making. if they use discounted hard currency flow and net nowadays value for doing investing determinations because a individual hurdle rate will blow up the value of some undertakings. while take downing the value of others. Epilogue

To remain competitory and bring forth the most value that they can for stockholders. companies review and update their schemes. Marriott Corporation is no different. Not long after the clip period associated with this instance. Marriott began to take dramatic stairss to maximise stockholder value. First. the company sold is restaurant runing division in 1990 ( White. 1989 ) . The competition from industry leaders was excessively intense and rapid enlargement would hold required a batch of extra capital. Subsequently. the company would travel through multiple spinoffs. In 1993. the company spun off Marriott International. which managed and franchised hotels and

retirement communities ( Marriott International. 2012 ) . The staying company changed its name to Host Marriott Corporation and owned many of the belongingss managed by Marriott International. In 1995. Host Marriott
Corporation spun off some of the contract services concern with the name Host Marriott Services. This allowed Host Marriott Corporation to concentrate on its existent estate assets. In 1998. Marriott International spun off its direction services concern in a amalgamation with Sodexho to make Sodexho Marriott Services.

Subsequently that twelvemonth. Host Marriott Corporation spun off is senior retirement existent estate concern as Crestline Capital Corporation. At the terminal of 1998. Host Marriott Corporation converted into a existent estate investing trust called Host Hotels & A ; Resorts ( Marriott International. 2012 ) . The last spin off conducted by Marriott International occurred towards the terminal of 2011. where it spun off its clip portion runing section as Marriott Vacations Worldwide Corporation ( NYSE: Vac ) . Marriott International is merely involved in lodging now and reorganized into four lodging divisions – North American Full-Service. North America limited-service. International Lodging and Luxury Lodging.

In footings of the fiscal scheme outlined by the Marriott Corporation in 1987. that scheme continues in Marriott International. It doesn’t own the belongingss. It merely manages and franchises them. At the terminal of financial twelvemonth 2011. its debt-to-market value ratio is 0. 1579. The company appears to be trying to minimise the sum of debt it uses. The cost of debt is about 5. 485 % and the cost of equity is about 11. 44 % . Marriott International’s WACC. based on 2011 fiscal statements is 10. 12 % .

Mentions
Marriott International ( 2012 ) . 2011 Annual Report. Retrieved from hypertext transfer protocol: //investor. stockholder. com/mar/sec. cfm? DocType= & A ; DocTypeExclude= & A ; Sort Order=FilingDate % 20Descending & A ; Year= & A ; Pagenum=4
Marriott International ( 2012 ) . Frequently Asked Questions. Retrieved from hypertext transfer protocol: //investor. stockholder. com/mar/faq. cfm
White. G. ( 1989. December 19 ) . Marriott to Sell Its Restaurants. Focus on Hotels: Services. LA Times. Retrieved from hypertext transfer protocol: //articles. latimes. com/1989-1219/business/fi-598_1_marriott-s-bob-s-big-boy