Marriot Fnce Case

FNCE 726

Case 1:

Executive summary:

After carefully analyzing the information given in the case an after making a set of assumptions (further detail in the body of the document) we recommend Marriot to consider the following hurdle rates:

* Corporation: 10.94%

* Lodging: 10.08%

* Restaurants: 13.78%

* Contract services: 11.11%

While calculating this numbers we were well aware of the importance of finding the correct cost of capital for each of the business units. Small changes in the cost of capital can have a major impact on the firm’s financial and operating strategies seen in Figure A. Therefore, this numbers are crucial to help Marriot identify the projects that will create the most value for shareholders as well as to decide in which business units to undertake them.

Weighted Average Cost of Capital:

In order to calculate the hurdle rates we used the WACC method for each of the business units and for the corporation as a whole. By using this method we assume that projects maintain their targeted debt / equity ratios for the life of each project.

Some of the elements of this formula are given (tax rate τ=34% in Case Questions) and the others we had to calculate with the information given and the assumptions we made.

1. Calculating rD

Marriott’s unsecured debt is A-rated so Marriott can expect to pay a spread above the current government bond rates. The issue we faced here was to decide which risk-free rate was more appropriate for each case? According to the information given, Marriot’s Restaurants and Contract services have project lives of around 10 years while the lodging division and Marriot as a whole had longer lives.

This allowed us to safely assume that the adequate rf for Restaurants and Contract Services was the corresponding to the U.S. Government Bond with a 10 year maturity (8.72%). For the business units with longer lives we chose the U.S Government Bond with a 30 year maturity (8.95%).

Finally, to calculate...