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Marriott Corporation- Corporate Finance presentation - Presentation Transcript

Marriott Corporation: The Cost of Capital October 14, 2008 Nroop Bhavsar Prerak shah

Company Background • Began with J. Willard Marriott’s root beer stand • Grew into one of the leading lodging and food service companies • Lines of business:  Lodging  Contract services  Restaurants

Company Goals • Intend to remain premier growth company:  Aggressively developing appropriate opportunities within existing line of business  To become preferred employer, preferred provider and the most profitable company in existing lines of business

Financial Strategy • Selection of investment project by discounting expected cash flow at hurdle rate for each divisions. – Hurdle rate is the minimum rate of return that must be met for a company to undertake a particular project. For example, Typical Hotel Profit and Hurdle rates 50% 40% 30% 20% Hurdle rate Profit rate 10% 0% 1 2 3 4 5 6 -10% -20%

Elements of Financial Strategy I. Manage rather than own hotel assets II. Invest in projects that increase shareholder value III. Optimize the use of debt in the capital structure IV. Repurchase undervalued share

Cost of Capital and the Comapny • Company measures opportunity cost of capital for investment with similar risk using the Weighted Average Cost of Capital. • WACC= (1-t)*rD*D/V + rE*E/V Where, t= corporate tax rate rD= cost of debt D/V= % of debt financing rE= cost of equity E/V= % of equity financing

Elements of WACC • Unlevered beta • Levered beta • Cost of equity • Cost of debt

Elements of WACC Levered Beta Unlevered Beta Beta of a company without any Beta of a leveraged required debt (Published beta) return Unlevering a beta removes the Hamada's formula: financial effects from leverage BL= Bu [1+ (1-t) D/E]

Elements of WACC • rE: cost of equity (CAPM) • rE= Rf + Beta*(Risk premium) where, Rf= risk free rate (generally, 3-month US treasury bill) Beta=...