Marriot Case - Corporate Finance

Please find below our analysis of Marriot’s current cost of capital across various business lines. The analysis is both quantitative and qualitative in nature. The purpose of the analysis is to i) analyze the firm’s growth strategy and ensure that is aligned with our financial strategy, ii) look at the firm’s average cost of capital (at the firm level) iii) determine what types of projects are appropriate with respect to this metric and iv) determine the firm’s cost of capital at a more granular level, specifically looking at each of our business units – Lodging, Restaurants and Contract Services

Financial Strategy & Growth Strategy

Marriot’s growth strategy is to be the preferred employer, preferred provider and most profitable company. In order to achieve these objectives, Marriot will need to invest capital wisely in each of these areas. This will require financial discipline to ensure the right amount of capital is being deployed and most importantly, that the appropriate financial analysis is conducted prior to capital allocation.

From a financial objective Marriot’s goals are listed below. We have outlined why we think these goals are/are not in line with the firm’s growth objectives.

Marriot – Firm wide Weighted Average Cost of Capital (WACC)

In order to quantify WACC we need to use the following formula – WACC = Rd*(D/V)*(1-T)+Re(E/V). This formula looks at Marriott cost of debt on a weighted basis (less our effective tax rate) plus the cost of equity on a weighted basis. Cost of debt is derived by taking the risk free rate (here 10 year government treasuries) plus the current spread on our corporate debt. This is investors expected return on Marriot debt. Cost of equity is derived by taking the spread on an index over the risk free rate (or the Market Risk Premium – MRP) times the firm’s beta. This is the risk adjusted return investors expect on Marriot equity. Based on our calculation, the overall WACC for the Marriot...