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MARRIOT CORPORATION CASE STUDY

Presented By
 Kamran Akhtar (CMS # 29568)
 Zia Ur Rehman (CMS # 29567)
 Anique Ahmed Butt (CMS # 27957)
 Rashid Mehmod Awan (CMS# 27958)
 Osama Hussain (CMS # 29291)

Presented to
Dr. Ahmed Faraz
WHAT IS THE FINANCIAL STRATEGY OF
MARRIOTT?
 Marriott Financial Strategy
Financial Strategy of Marriott are mention below:
 Manage Rather than own hotel.
 Invest in project that increase share holder value.
 Optimize the use of debt in the capital structure.
 Repurchase undervalued shares.
WEIGHTED AVERAGE COST OF
MARRIOTT (WACCM)
 Weighted Average Cost of Capital – Marriott (WACCM)

The formula for WAACR is:

WACC = 𝑬/𝑽*KE + D/V*KD(1-t)

Where:
D = Market Value of the Debt
E = Market Value of the Equity
V = D + E (Value of the Firm)
KE = Cost of Equity
KD = Cost of Debt
t = Tax Rate

The formula for KE & KD is:

KE = Rf + β(Rm – Rf)
RD = Base Rate + Spread
Contd.….
 Weighted Average Cost of Capital – Marriott (WACCM)

BETA OF MARRIOTT
 Unlevered Beta of Marriott:
βUL = β Lx
= 1.1 ()
βUL = 0.7918

 Levered Beta of Marriott:

βL = βULx
= 0.7918()
βL = 1.46

Contd.….
 Weighted Average Cost of Capital – Marriott (WACCM)
 Marriott Cost of Equity
KE = Rf + β(Rm – Rf)

Where:
Rf = 8.95% (Table A)
β = 1.46
(Rm-Rf) = 7.43% (Exhibit 5)

KE = Rf + β(Rm – Rf)
= 8.95 + 1.46(7.43)
= 19.80%

 Marriott Cost of Debt

Kd = Base Rate + Spread
= 8.95% + 1.30%
= 10.25%
Contd.….
 Weighted Average Cost of Capital – Marriott (WACCM)

 WACC of Marriott:
WACCM = *KE + D/V*KD(1-t)
=(0.40/1)(0.198) + (0.60/1)(0.1025)(1-0.44)
= 0.1136
= 11.36%

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WEIGHTED AVERAGE COST OF
LODGING (WACCM)
 Weighted Average Cost of Capital – Lodging (WACCL)

Beta (β) of Lodging:

Unlevered Beta
βUL = βLx
Comparable Hotels Beta Debt Equity Tax

Hilton Hotel Corporation 0.76 14% 86% 44% 0.70

Holiday Corporation 1.35 79% 21% 44% 0.43

LA Quinta Motor INNS 0.89 69% 31% 44% 0.40

Ramada INNS INC 1.36 65% 35% 44% 0.67

Total 2.20

Average Beta (β) of Lodging 0.55

Unlevered Beta of Lodging = 0.55

Contd.….
 Weighted
WeightedAverage
AverageCost Capital– –Restaurant
CostofofCapital Lodging (WACC
(WACC
L)R)

 Unlevered Beta of Lodging = 0.55

New Debt Ratio = 74% (Table A)
Equity = 100% - 74%
= 26%
 Levered Beta of Lodging
βL = βULx

= 0.55()
βL = 1.426

Contd.….
 Weighted Average Cost of Capital – Lodging (WACCL)
 Lodging Cost of Equity
KE = Rf + β(Rm – Rf)
Where:
Rf = 8.95% (Table A)
β = 1.426
(Rm-Rf) = 7.43% (Exhibit 5)

KE = Rf + β(Rm – Rf)
= 8.95 + 1.426(7.43)
= 19.55%

 Lodging Cost of Debt

Kd = Base Rate + Spread
= 8.95% + 1.10%
= 10.05%
Contd.….
 Weighted Average Cost of Capital – Lodging (WACCL)

 WACC of Lodging:
WACCR = 𝑬/𝑽*KE + D/V*KD(1-t)
=(0.26/1)(0.1955) + (0.74/1)(0.1005)(1-0.44)
= 0.0925
= 9.25%

*******************
WEIGHTED AVERAGE COST OF
RESTAURANT (WACCR)
 Weighted Average Cost of Capital – Restaurant (WACCR)

The formula for WAACR is:

WACCR = 𝑬/𝑽*KE + D/V*KD(1-t)

Where:
D = Market Value of the Debt
E = Market Value of the Equity
V = D + E (Value of the Firm)
KE = Cost of Equity
KD = Cost of Debt
t = Tax Rate

The formula for KE & KD is:

KE = Rf + β(Rm – Rf)
RD = Base Rate + Spread
Contd.….
 Weighted Average Cost of Capital – Restaurant (WACCR)

Beta (β) of Restaurant:

Unlevered Beta
Comparable Restaurant Beta Debt Equity Tax βUL = βLx

Church’s Fried Chicken 1.45 4% 96% 44% 1.42

Collings Foods Int’l 1.45 10% 99% 44% 1.37
Frish’s Resturants 0.57 6% 94% 44% 0.55
Luby’s Cafeterias 0.76 1% 99% 44% 0.76

McDonald’s 0.94 23% 77% 44% 0.81

Wendy’s International 1.32 21% 79% 44% 1.15

Total 6.06
Average Beta (β) of Restaurant 1.01

Unlevered Beta of Restaurant = 1.01

Contd.….
 Weighted Average Cost of Capital – Restaurant (WACCR)

 Unlevered Beta of Restaurant = 1.01

New Debt Ratio = 42% (Table A)
Equity = 100% - 42%
= 58%
 Levered Beta of Restaurant
βL = βULx
= 1.01 ()
βL = 1.419

Contd.….
 Weighted Average Cost of Capital – Restaurant (WACCR)
 Restaurant Cost of Equity
KE = Rf + β(Rm – Rf)
Where:
Rf = 8.72% (Table A)
β = 1.419
(Rm-Rf) = 7.43% (Exhibit 5)

KE = Rf + β(Rm – Rf)
= 8.72 + 1.419(7.43)
= 19.26%

 Restaurant Cost of Debt

Kd = Base Rate + Spread
= 8.72% + 1.80%
= 10.52%
Contd.….
 Weighted Average Cost of Capital – Restaurant (WACCR)

 WACC of Restaurant:
WACCR = 𝑬/𝑽*KE + D/V*KD(1-t)
=(0.58/1)(0.1927) + (0.42/1)(0.1052)(1-0.44)
= 0.1365
= 13.65%

*******************
WEIGHTED AVERAGE COST OF
CONTRACT SERVICES (WACCCS)
Weighted Average Cost of Capital–Contract Services(WACCCS)

The formula for WAACCS is:

WACCCS = 𝑬/𝑽*KE + D/V*KD(1-t)

Where:
D = Market Value of the Debt
E = Market Value of the Equity
V = D + E (Value of the Firm)
KE = Cost of Equity
KD = Cost of Debt
t = Tax Rate

The formula for KE & KD is:

KE = Rf + β(Rm – Rf)
RD = Base Rate + Spread
Contd.….
Weighted Average Cost of Capital–Contract Services(WACCCS)

 Beta (β) of Contract Services:

βM = WLβL + WCSβCS + WRβR

 Weight of Division

Division Assets Weight

Lodging (WL) 2,777.40 0.61

Contract Services (WCS) 1,237.70 0.27
Restaurants (WR) 567.60 0.12
Total 4,582.70

Contd.….
Weighted Average Cost of Capital–Contract Services(WACCCS)

 Unlevered Beta of Contract Services

βM = WLβL + WCSβCS + WRβR
0.7918 = (0.61)(0.55) + (0.27)(βCS) + (0.12)(1.01)
βCS = 1.24

 Levered Beta of Contract Services

βCS = βULx
= 1.24 ()
βCS = 1.70

Contd.….
Weighted Average Cost of Capital–Contract Services(WACCR)
 Contract Services Cost of Equity
KE = Rf + β(Rm – Rf)
Where:
Rf = 8.72% (Table A)
β = 1.70
(Rm-Rf) = 7.43% (Exhibit 5)

KE = Rf + β(Rm – Rf)
= 8.72 + 1.70(7.43)
= 21.35%

 Contract Services Cost of Debt

Kd = Base Rate + Spread
= 8.72% + 1.40%
= 10.12%
Contd.….
Weighted Average Cost of Capital–Contract Services(WACCR)

 WACC of Contract Services:

WACCCS = 𝑬/𝑽*KE + D/V*KD(1-t)
=(0.60/1)(0.2135) + (0.40/1)(0.1012)(1-0.44)
= 0.1365
= 15.08%

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 ALTERNATE METHOD
WEIGHTED AVERAGE COST OF
MARRIOTT (WACCM)
 Weighted Average Cost of Capital – MARRIOTT (WACCM)

 WACCM of MARRIOTT:
WACCM = WL(WAACL) + WR(WAACR) + WCS(WAACCS)
= (0.61)(0.0925)+(0.12)(0.1365)+(0.27)(0.1508)
WACCM = 0.0564 + 0.0164 + 0.0408
= 0.1136
WR(WAACR) = 11.36%

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KEEP CALM AND THANK YOU
FOR YOUR CONSIDERATION