Financial Analysis for Marriott

Problem Statement

Marriott Corporation’s Vice-President of Project Finance, Mr. Dan Cohrs has been tasked with determining appropriate hurdle rates for the three operating divisions in the upcoming year, 1988. The three operating divisions include lodging, contract services, and restaurants. The overall company strategy is to “remain a premier growth company”, which is evidenced in the previous year through sales growth of 24% return on equity of 22%. Mr. Cohrs has hired Limitless Financial Consulting to assist with the calculation of appropriate hurdle rates for Marriott Corporation.

Background

J. William Marriott started the Marriott Corporation in 1927 as a root beer stand. Over the next 60 years the company grew immensely, becoming one of the top lodging and food service businesses in the United States.

The three major lines of business for the Marriott Corporation includes lodging, contract services and restaurants. Lodging includes 361 hotels with over 100,000 rooms. This division holds a variety of hotels, from the moderate Fairfield Inn, to the high-end Marriott Hotels and Suites. This line of business contributes about 41% of sales and 51% of profits overall.

The contract services division also is diverse in its offerings, with operations in food and services management for health care, education, and corporations. It also provides catering and airline services. This division accounted for 46% of sales in 1987 and 33% of profits.

The restaurant division operates three separate brands including Bob’s Big Boy, Roy Rogers, and Hot Shoppes. These drove 13% of overall sales and 16% of profits in the previous year.

Marriott uses the weighted average cost of capital (WACC) to measure the opportunity cost of capital for investments. A WACC is required for each division because the factors included in determining these rates will differ significantly between Marriott’s divisions. These rates also need to be updated annually as firm and market conditions...