Marriott Corp.

/Cost
Harvard Business School Case #298-101
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Table A Market Value-Target Leverage Ratios and Credit Spreads for Marriott and Its Divisions

Debt Fraction Fraction Debt Rate

Percentage of Debt of Debt Premium above
in Capital at Floating at Fixed Government

Marriott 60% 40% 60% 1.30%

Lodging 74 50 50 1.10%
Contract services 40 40 60 1.40%
Restaurants 42 25 75 1.80%
Table B U.S. Government Interest Rates, April 1988

Maturity Rate

30-year 8.95%
10-year 8.72
1-year 6.90
 Contract
Company Lodging Service Restaurant
Tax Rate (t) 44.05% 44.05% 44.05% 44.05%
Cost of debt (rD ) 10.25% 10.05% 10.35% 10.75%

beta co-efficient 1.11 0.76

market leverage 41.22% 41% 14%
expected leverage 60% 74% 40% 42%
Formula 1 for unlevering of debt:
beta of an unlevered firm 0.80

effective beta 1.47

Market risk premium (rM-rF) 7.43% 7.43%
Risk-free rate (rF) 8.95% 8.95% 8.95% 8.95%
Cost of equity (rE) 19.87%

WACC 1 11.39%
 Contract
Company Lodging Service Restaurant
Tax Rate (t) 44.05% 44.05% 44.05% 44.05%
Cost of debt (rD ) 10.25% 10.05% 10.35% 10.75%

beta co-efficient 1.11

market leverage 41% 14% 10%
expected leverage 60% 74% 40% 42%
Formula 2 for unlevering of debt:
beta of an unlevered firm 0.65 0.57 0.82

effective beta 1.64 2.18 0.00 1.41

Market risk premium (rM-rF) 7.43% 7.43% 7.43% 7.43%
Risk-free rate (rF) 8.95% 8.95% 8.95% 8.95%
Cost of equity (rE) 21.11% 25.12% 19.45%

WACC 2 11.89% 10.69% 13.81%

Exhibit 1 Financial History, 1978-1987 (millions of dollars except per share data)

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Summary of Operations
Sales $1,174.1 $1,426.0 $1,633.9 $1,905.7 $2,458.9 $2,950.5 $3,524.9 $4,241.7 $5,266.5 $6,522.2
Earnings before interest expense and income taxes 107.1 133.5 150.3 173.3 205.5 247.9 297.7 371.3 420.5 489.4
Interest expense 23.7 27.8 46.8 52.0 71.8 62.8 61.6 75.6 60.3 90.5
Income before income taxes 83.5 105.6 103.5 121.3 133.7 185.1 236.1 295.7 360.2 398.9
Income taxes 35.4 43.8 40.6 45.2 50.2 76.7 100.8 128.3 168.5 175.9
Income from continuing operationsa 48.1 61.8 62.9 76.1 83.5 108.4 135.3 167.4 191.7 223.0
Net income 54.3 71.0 72.0 86.1 94.3 115.2 139.8 167.4 191.7 223.0
Funds from continuing operationsb 101.2 117.5 125.8 160.8 203.6 272.7 322.5 372.3 430.3 472.8

Capitalization and Returns

Total assets $1,000.3 $1,080.4 $1,214.3 $1,454.9 $2,062.6 $2,501.4 $2,904.7 $3,663.8 $4,579.3 $5,370.5
Total capital c
826.9 891.9 977.7 1,167.50 1,634.50 2,007.50 2,330.70 2,861.40 3,561.80 4,247.80
Long-term debt 309.9 365.3 536.6 607.7 889.3 1,071.60 1,115.30 1,192.30 1,662.80 2,498.80
Shareholders’ equity 418.7 413.5 311.5 421.7 516.0 628.2 675.6 848.5 991.0 810.8
Long-term debt/total capital 37.5% 41.0% 54.9% 52.1% 54.4% 53.4% 47.9% 41.7% 46.7% 58.8%

Per Share and Other Data

Earnings per share
Continuing operationsa $0.25 $0.34 $0.45 $0.57 $0.61 $0.78 $1.00 $1.24 $1.40 $1.67
Net income 0.29 0.39 0.52 0.64 0.69 0.83 1.04 1.24 1.40 1.67
Cash dividends 0.026 0.034 0.042 0.051 0.063 0.076 0.093 0.113 0.136 0.17
Shareholders’ equity 2.28 2.58 2.49 3.22 3.89 4.67 5.25 6.48 7.59 6.82
Market price (year-end) 2.43 3.48 6.35 7.18 11.70 14.25 14.70 21.56 29.75 30.00
Shares outstanding (millions) 183.6 160.5 125.3 130.8 132.8 134.4 128.8 131.0 130.6 118.8
Return on average shareholders’ equity 13.9% 17.0% 23.8% 23.4% 20.0% 20.0% 22.1% 22.1% 20.6% 22.2%

Source: Company reports

a
The company’s theme park operations were discontinued in 1984.
b
Funds provided from continuing operations consist of income from continuing operations plus depreciation, deferred income taxes, and other items not currently affecting working capital.
c
Total capital represents total assets less current liabilities.
Exhibit 2 Financial Summary by Business Segment, 1982-1987 (millions of dollars)

1982 1983 1984 1985 1986 1987

Lodging

Sales $1,091.7 $1,320.5 $1,640.8 $1,898.4 $2,233.1 $2,673.3

Operating profit 132.6 139.7 161.2 185.8 215.7 263.9
Identifiable assets 909.7 1,264.6 1,786.3 2,108.9 2,236.7 2,777.4
Depreciation 22.7 27.4 31.3 32.4 37.1 43.9
Capital expenditures 371.5 377.2 366.4 808.3 966.6 1,241.9

Contract Services

Sales 819.8 950.6 1,111.3 1,586.3 2,236.1 2,969.0

Operating profit 51.0 71.1 86.8 118.6 154.9 170.6
Identifiable assets 373.3 391.6 403.9 624.4 1,070.2 1,237.7
Depreciation 22.9 26.1 28.9 40.2 61.1 75.3
Capital expenditures 127.7 43.8 55.6 125.9 448.7 112.7

Restaurants

Sales 547.4 679.4 707.0 757.0 797.3 879.9

Operating profit 48.5 63.8 79.7 78.2 79.1 82.4
Identifiable assets 452.2 483.0 496.7 582.6 562.3 567.6
Depreciation 25.1 31.8 35.5 34.8 38.1 42.1
Capital expenditures 199.6 65.0 72.3 128.4 64.0 79.6

Source: Company reports

Exhibit 3 Information on Comparable Hotel and Restaurant Companies

Arithmetic 1987
Average Equity Market Revenues
Company and Nature of Business Returna Betab Leveragec ($ billions)

Marriott Corporation 22.4% 1.11 41% $6.52

(Owns, operates, manages hotels,
restaurants, airline and institutional food
services)

Hilton Hotels Corporation 13.3 0.76 14% 0.77

(Owns, manages, licenses hotels; operates
casinos)

Holiday Corporation 28.8 1.35 79% 1.66

(Owns, manages, licenses hotels,
restaurants; operates casinos)

La Quinta Motor Inns -6.4 0.89 69% 0.17

(Owns, operates, licenses motor inns)

Ramada Inns 11.7 1.36 65% 0.75

(Owns, operates hotels, restaurants)

Church’s Fried Chicken -3.2 1.45 4% 0.39

(Owns, franchises restaurants, gaming
businesses)

Collins Foods International 20.3 1.45 10% 0.57

(Operates Kentucky Fried Chicken
franchise, moderately priced restaurants)

Frisch’s Restaurants 56.9 0.57 6% 0.14

(Operates, franchises restaurants)

Luby’s Cafeterias 15.1 0.76 1% 0.23

(Operates cafeterias)

McDonald’s 22.5 0.94 23% 4.89

(Operates, franchises, services
restaurants)

Wendy’s International 4.6 1.32 21% 1.05

(Operates, franchises, services
restaurants)

Source: Casewriter’s estimates.

a
Calculated over period 1983-1987.
b
Estimated by ordinary least-squares regression using daily data over 1986-1987 period.
c
Book value of debt divided by the sum of the book value of debt plus the market value of equity.
Unleverd
beta

0.6549

0.6536 LODGING

0.2835

0.2759

0.476 LODGING

1.392

1.305 RESTAURANT

0.5358 RESTAURANT

0.7524

0.7238 RESTAURANT

1.0428 RESTAURANT
Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987

Arithmetic Standard
Average Deviation

Short-Term Treasury Bill Returns

1926-1987 3.54% 0.94%

1926-1950 1.01 0.40

1951-1975 3.67 0.56
1976-1980 7.80 0.83
1981-1985 10.32 0.75
1986 6.16 0.19
1987 5.46 0.22

Long-Term U.S. Government Bond Returns

1926-1987 4.58% 7.58%

1926-1950 4.14 4.17
1951-1975 2.39 6.45
1976-1980 1.95 11.15
1981-1985 17.85 14.26
1986 24.44 17.30
1987 -2.69 10.28

Long-Term, High-Grade Corporate Bond Returns

1926-1987 5.24% 6.97%

1926-1950 4.82 3.45
1951-1975 3.05 6.04
1976-1980 2.70 10.87
1981-1985 18.96 14.17
1986 19.85 8.19
1987 -0.27 9.64

Standard & Poor’s 500 Composite Stock Index

Returns

1926-1987 12.01% 20.55%

1926-1950 10.90 27.18
1951-1975 11.87 13.57
1976-1980 14.81 14.60
1981-1985 15.49 13.92
1986 18.47 17.94
1987 5.23 30.50

Source: Casewriter’s estimates based on data from the University of Chicago’s Center for Research in Securit
Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates, 1926-1987

Arithmetic Standard
Average Deviation

Spread between S&P 500 Composite Returns and

Short-Term Treasury Bill Returns

1926-1987 8.47% 20.60%

1926-1950 9.89 27.18
1951-1975 8.20 13.71
1976-1980 7.01 14.60
1981-1985 5.17 14.15
1986 21.31 17.92
1987 -0.23 30.61

Spread between S&P 500 Composite Returns and

Long-Term U.S. Government Bond Returns

1926-1987 7.43% 20.78%

1926-1950 6.76 26.94
1951-1975 9.48 14.35
1976-1980 12.86 15.58
1981-1985 -2.36 13.70
1986 -5.97 14.76
1987 7.92 35.35

Spread between S&P 500 Composite Returns and

Long-Term, High-Grade Corporate Bond Returns

1926-1987 6.77% 20.31%

1926-1950 6.08 26.70
1951-1975 8.82 13.15
1976-1980 12.11 15.84
1981-1985 -3.47 13.59
1986 -1.38 14.72
1987 5.50 34.06

Source: Casewriter’s estimates based on data from the University of Chicago’s Center for Research in Security