Marriott Corporation

Case Background

Marriott Company began in 1927.And in the following 60 years, it grew into one of the leading lodging and food services companies in the United States. Up to 1987, it made a profit of $233 million and sale of $6.5 billion. Its three main lines of business are lodging, contract business and restaurants.

Marriott Company’s financial strategy is mainly composed of four key elements: first, manage rather than own hotels; second, invest in projects that increase shareholder value; third, optimizing the use of debt in the capital structure; and the last one is to repurchase undervalued shares.

Objectives

In this case, Marriott company used hurdle rates to determine share repurchase, capital investments and syndications as well as executive compensation.

We can find from Figure A, that at 10% hurdle rate, this company will make nothing but zero profit. If we choose 9% hurdle rate, then the profit rate will rise to about 10%--a substantial change. So the change in hurdle rate can result in a corresponding change in profit rate. So it is very important for Marriott Company to find the suitable hurdle rates.

Our objectives is working out the hurdle rates of Marriott and its three divisions for Marriott company.

The Process of Calculating the Hurdle Rate

Since Marriott Company measures the opportunities cost of capital for investments of similar risk using the weighted average cost of capital (WACC), we can use the figures, tables and exhibits provided to compute the WACC for Marriott Company.

ⅰ. Calculating the Equity Costs

To begin with, we use the CAPM model to compute the cost of equity of the whole company and its three divisions.

(ⅰ)Determining the Risk-free Rate

We use current government interest rate because we are now predicting the current projects’ WACC as well as expected return. Besides, we assume that Marriott and its lodging division have longer economics life, so we choose the 30-year government interest rate as their risk-free...