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Sanjiv Kumar || Section-C || 2010PGP333 || Finance Assignment-2

Marriot Corporation

Introduction Marriot Corporation was started by J. Willard Marriot in 1927. In 1987, the company had profits of $223 million and sales of $6.5 billion. It had grown into a leading lodging and food service company of USA. Its business is spread in three different areas - lodging, contract services and restaurants. Lodging is accounted for 51% of its profits, Contract services accounted for 33% of its profits, and Restaurants accounted for the remaining 16% of the profits of the firm. The company has following strategies:     Managing rather than owning hotel assets Investing in projects that increase shareholder value Optimizing the use of debt in the capital structure, and Repurchasing undervalued shares

Current Situation Marriot Corporation presently faces the main problem in evaluating its investment decisions in the three divisions it has. The hurdle rates for each of the division determine these decisions and determining these rates itself is not done in the correct way presently. The following points elucidate the problem of Marriott international in detail:  The management acknowledged the fact that divisional hurdle rates could have an impact on the financial and operating strategies. If hurdle rates increased, the company’s growth could reduce and vice versa. At present, the incentive compensation was based on earning level, meeting target budgets and corporate performance. Using hurdle rates for determining incentive compensation, thus making managers sensitive to company’s strategies and market conditions, was also being considered by the management. Two problems in using the historical values of beta for calculating hurdles rate. Firstly, the company’s beta was weighted average of betas across all divisions. Secondly, adding debt to a firm increased its equity beta while the risk of the firm’s assets remained same. Estimating the right β values for the...