Marriot Corporation Case Study

Marriot Corporation: Cost of capital

1. Are the four components of Marriott's financial strategy consistent with its growth objectives?

The company's growth objective is to remain a premier growth company by aggressively developing appropriate opportunities within its lines of business. They have to make the most value out of their investment and maximize the use of their capital by picking projects with the highest NPV while maximizing Return-on-assets (ROA), Return-on-equity (ROE) and company value. In my opinion, all four financial strategy listed are consistent with Marriot's growth objective.

Without having to build new hotels and inns, Marriot avoid the large initial cash outflows usually associated with this line of business and therefore projects will have higher NPV. They also reduce their amount of assets and given the same return, they will have a higher ROA. The second financial strategy means that Marriott will have to make wise investment decisions. Based on the discounted cash flow technique, which discount all future cash flow to present value, Marriott will be able to calculate the NPV and IRR of each projects and make decisions based on how profitable each investment are. The third objective means that Marriot will try to have a lower percentage of debt in their capital structure. Company with low percentage of debt usually have higher value and if Marriot is able to keep up with this strategy, it will maximize its value. Marriot's last financial strategy is to repurchase their undervalued shares. This means that they are very confident about their ability to accelerate growth and increase the share price to the level where they think it should be. If Marriott performs well, these repurchase will lead to higher ROE and higher P/E ratio.

2. How does Marriot use its estimate of its cost of capital? Does this make sense?

The costs of capital are determined for the company as a whole and for each division. After the costs of capital are...