Marriott Case

In the late 1980s, Marriott Corporation was as much an asset management firm as it was a hospitality company. The company operated three main lines of business: lodging (generating 41% of sales and 51% of profits in 1987), contract services (46% of sales and 33% of profits in ’87) and restaurants (13% of sales and 16% of profits in ’87). Investment projects were selected and developed with an eye toward managing (rather than owning) expensive property and real estate. The company identified investment projects and developed related assets only to sell these assets to partners while maintaining operating control. This strategy fell directly in line with the other components of Marriott’s focused financial strategy: investing in projects that would increase shareholder value, optimizing the use of debt in their capital structure, and repurchasing undervalued equity shares.

In evaluating investment projects the company applied a standardized system of analysis allowing managers to account for division-specific customization of assumptions. For example, they would apply similar measures of macro data including inflation, project lives, terminal values, and percent of sales required to remodel. However, Marriott also recognized that the cost of capital for projects in different divisions was different. Therefore, calculating the Weighted Average Cost of Capital (WACC, based on divisional debt capacity, debt cost, and equity cost) shaped assumptions about the projects in which the company should invest. Using divisional WACCs allowed each line of business to make prudent decisions about which projects would produce the highest net present values based on projected discounted cash flows.

Determining The Risk-Free Rate and Market Risk Premium

We used 6.90% as our measure for the risk-free rate, rf , because at the given time this is what was the yield on 1-year Treasury bills (Page 4, Table B). This risk-free rate was applied to all three divisions, regardless...