Submitted by: Submitted by Menan
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Category: Business and Industry
Date Submitted: 04/12/2011 06:03 AM
Marriot Case
Q1
1) Manage rather than own hotel assets: After development, Marriott sold its hotel assets to limited partners to increase its ROA and thereby increase potential profitability.
2) Invest in projects that increase shareholder value: directs Marriott to focus only on such projects that will provide potential return to the company if compared to expected return from discounted cash flow techniques and considering other significant conditions such as project risk.
3) Optimize the use of debt in the capital structure: Marriott uses this strategy to decrease its Debt to equity ratio, thereby reducing risk and increasing its profitability because firms with conservative financing have low risk and large gains in earnings.
4) Repurchase undervalued shares: Marriott Corporation will repurchase its stocks if the price falls below "warranted equity value" thus boosting investor confidence. Repurchasing the share will reduce no. of shares outstanding, thus increase EPS and also increase market value of remaining shares. Repurchasing shares would allow Marriott to pass on extra cash to shareholders without raising the dividend.
Q2.
Q3 Actual Debt = 2498.8, Actual Equity = 118.8*30 = 3564.0
So, D/V = 41%, and E/V = 59%
βA = βE (E/V) + βD (D/V)
= 1.1(59%) + 0(41%)
= .65
Target D/V = 60%, So E/V = 40% (Year 1988)
βE = βA + (βA ¬- βD) D/E
= .65 + (.65 - 0) 60/40
= 1.63
Cost of equity
RE = RF + βE (RM - RF)
= 4.58 + 1.63(12.01-4.58)
= 16.69%
Cost of Debt
RD = Credit Spread + Return on Govt. bond
= 74 (1.1+8.95) + 40 (1.4+8.72) + 42(1.8+8.72)
= 15.90%
WACCMarriott = RE (E/V) + RD (D/V) (1-TC)
= 16.69(40) + 15.9 (60) (1-.44)
= 12.02 %
Q6) Cost of Capital for Lodging and Restaurant
Lodging:
βE = (.76 + 1.35 + .89 + 1.36)/4 = 1.09...