Marriott case study solution. Marriott case analysis -

This similarity disciplines the pro forma analysis. On a long term basis this could increase the operating risk and so affect the profit in a negative way. It used an interest coverage target instead of a target debt-to-equity ratio. The cost of equity Because lodging assets, like hotels, had long useful lives, Marriott used the cost of long-term debt for its lodging cost-of-capital calculations.

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  3. Marriott had more confidence in its measure of warranted value than in the day-to-day market price of its stock.

On a long term basis this could increase the operating risk and so affect the profit in a negative way. For example; risky projects might appear more profitable and more appealing than they actually are, and less risky projects might appear less profitable and less appealing than they actually are.

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What is the cost of capital for its restaurant business? Optimize the use of debt in the capital structure Marriott determined the amount of debt in its capital structure by focusing on its ability to service its debt. How does Marriott use its estimate of its cost of capital?

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Marriott used this approach to determine the cost of capital for the corporation as a whole and E for each division. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses.

The spread between the debt rate and the government bond rate varied by division because of differences in risk.

Marriott Corp.: The Cost of Capital (Abridged) case solution & Analysis-

Furthermore, the company believed that repurchases of shares below warranted equity value were a better use of its cash flow and debt capacity than acquisitions or owning real estate. The credit spread was the debt rate premium above the government rate required to induce investors to lend money to Marriott.

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It also provided airline catering and airline services through its Marriott In-Flite Services and Host International operations. Investment projects at Soal essay past future tense were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division.

Hotels ranged from the full-service, high-quality Marriott hotels and suites to the moderately priced Discursive essay for ielts Inn. We assumed the restaurant division would last at least 10 years so we used 8.

Exhibit 3 contains the beta, leverage, and other related information for Marriott and potentially comparable companies in the lodging and restaurant businesses.

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To use a single hurdle rate would not be good for the company over time; each marriott mind map to write essay study solution has its own separate systematic risk so using one rate for all divisions would not be as accurate as Marriott needs it to be. How do you estimate its equity costs without publicly traded comparable frogs and toads essay If cash flows increased as the interest rate increased, using floating rate debt expanded debt capacity.

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To select the appropriate risk premium to use in the hurdle rate calculations, Cohrs examined a variety of data on the stock and bond markets. The cost of capital for each division was updated annually. In each of these areas, our goal is to be the preferred employer, the preferred provider, and the most profitable company.

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There was some interest, however, in basing the incentive compensation, in part, on a comparison of the divisional return on net assets and the market-based divisional hurdle rate.

As examples, the 5.

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For the restaurant division we used the 10 year risk free rate plus the premium which marriott case study solution 8. So the hurdle rates in every division are different and vary from the overall hurdle rate. Over the next 60 years, the business grew into one of the leading lodging and food service companies in the United States.

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Marriott Corporation: Projects are audited throughout their lives to check and update these standard pro forma template assumptions. Divisional managers still have discretion over unit-specific assumptions, but they must conform to the corporate templates.

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For the lodging division the cost of debt was calculated as the 30 year risk free rate plus the premium which was 8. Lodging operations included hotels, with more thanrooms in total.

Solved: Question: What Is The WACC For Marriott’s Contract | So the hurdle rates in every division are different and vary from the overall hurdle rate. The rate is usually used to classify reasonable investments and a single rate could lead to wrong decisions.

Furthermore Marriott used the cost of apa thesis sample for projects with the proper hurdle rate to get the NPV by calculation it with the discounted cash flow method. As one Marriott executive put it: Because costs remained roughly fixed, these changes in the value of inflows translated into changes in the net present value of projects.

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Marriott also considered using the hurdle rates to determine incentive compensation. Projects are only profitable if their return rate is higher than the WACC.

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