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Marriott's Financial Strategy Case Study

Autor:   •  April 11, 2011  •  Case Study  •  4,386 Words (18 Pages)  •  2,355 Views

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1. Are the four components of Marriott's financial strategy consistent with its growth objective?

Marriott's growth objectives were to remain the premier growth company by aggressively developing opportunities within the three lines of its business, lodgings, contract services and restaurants. The company wanted to:

1. Manage rather than own

2. Invest in projects that increase shareholder value

3. Optimize the use of debt in the capital structure

4. Repurchase undervalued shares

First strategy of managing rather than owning is consistent with a growth objective. By selling off its hotels Marriott compliments it's ROA increasing potential profitability and its financial position within the market which will then indirectly reduce the risk of investment in the organization. It increases the EPS and optimizing the use of debt in the capital structure, based on coverage target instead of a target debt to equity ratio also increases the EPS by reducing the amount of equity at the maximum level. But there are some risks associated with this there may be barriers to exit if the real estate market falls and then Marriot could incur losses instead of profits on the sales. If the contractual obligations aren't secure then Marriot as the managers of the hotels rather than the owners could potentially be ousted by the owners for other organization who provide the services better or cheaper.

One of the issues is that Marriot needs to determine hurdle rates for the company as a whole and for each division. Evaluating the hurdle rate is crucial because this is extremely important for business operations and future projects. The right WACC must be determined for each division, since there are different risks involved in the different business lines each division must be determined independently from the other. So it would be incorrect to use a single cost of capital for Marriot. The market risks for each division differ and determining the cost of capital for the entire corporation will not reflect the unique risk of each business line. To estimate the unique risks within each business line Marriot should use equity betas from comparable companies within the same industry lines. We assumed that the companies they compare to have the same risks. If you wanted to use a divisional WACC then this should only be used to assess divisional projects. The misuse of the WACC could mean that there would be an under or over estimation in the NPV and a project could be rejected or taken incorrectly. Using a single hurtle rate for the whole company would be too low for some divisions and too high for others. If the hurtle rate is too high too few projects would be considered profitable and preset value of projects inflows would be

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