Case Report #6: Marriott Corporation
Subject: Marriott Corporation : The Cost of Capital
Problem: Marriott Corporation needs to determine suitable hurdle rates for each of its three divisions. These rates will be used to discount cash flows of potential future projects.
Options: 1. Compute the WACC under the classical tax system for the company as a whole and for each division of the company
2. Present recommendations for hurdle rates of Marriott's different divisions to select by discounting appropriate cash flows by the appropriate hurdle rate for each division
Recommendation: Given the policies and strategies related with hurdle rates and cost of capital, Marriot Corporation should follow their target debt/value structure because it will minimize their weighted average cost of capital.
Analysis: Marriot Corporation is a 1927 US-based company specialized in the hotel management industry. Its operations and product line have expanded substantially in the last few decades and the management team intend to remain a premier growth company. As a consequence, - (to keep on growing it will need to invest in new projects with positive NPVs)
Marriott Corporation, one of the largest US corporations in hotel management and other support services (restaurants, contracts) has an objective to remain a premier growth company. In fact, their business goals consist of keeping a significant growth pace by setting consistent business strategies and developing appropriate investment opportunities in their different business divisions. In the same line of thought, Marriott is determined to develop and to enhance its position in each division.
Marriott Corporation has 3 major lines of business: lodging, contract services and restaurants. In order to achieve their goal, the managers of Marriott have developed a well-rounded financial strategy with four main decisions. The four...