Unilever and Royal Dutch Shell are non-cyclical firms and are not as sensitive to systematic risk as Randstad cyclical firm. The beta levels are not surprising at all. We also have to choose the appropriate market risk premium and risk free rate. The hurdle rates were based on market interest rates, project risk, and evaluations of risk premiums. We assume that lodging and restaurants divisions have the same debt percentage in capital and the cost of debt as the Marriott Corporation. What should Radio One offer for the new stations? Lodging division which includes 361 hotels generated 41% of 1987 sales.
The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. Debt, Finance, Interest 1811 Words 6 Pages analysis of Marriott Corporation for calculating the hurdle rates at each of the firm's three divisions--lodging division, restaurant division and contract service division. Do you agree with Mr. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. Risk free rate Lodging division 30 years Maturity U. To evaluate the worth of new investments, Lex uses discounted cash flow analysis.
Lodging: Competitor average unlevered beta 0. However, we need to calculate the Government Interest Rates for each category. This main goal contains 3 others more detailed components: - To become the most profitable company. Marriott is determined to develop and to enhance its position in each division and remain a premier growth company as stated in the annual report 1987. A firm that generates higher than it costs the company to raise the capital needed for that investment is earning excess returns. This means aggressively developing appropriate opportunities within our chosen lines of business—lodging, contract services, and related businesses. Risk premium is the difference between the expected return on a market based portfolio and the risk-free rate.
The components of this financial strategy are 1 manage rather than own hotels; 2 invest in projects that increase shareholder value; 3 optimize the use of debt in the capital structure; and 4 repurchase undervalued stock. The third strategy consists of optimizing their use of debt in the capital structure. What are its most viable sources of financing over the same period? See Exhibit 8B for an estimate of mature store margins. As this type of decision making continues Marriott will be assuming higher risk as it to approve riskier projects. In addition, to selecting profitable investments, Marriott Corporation has done a lot to show shareholders that they are a priority. We chose to use 30 year rate for lodging since that probably lasts the longest, 10 year rate for restaurants since they probably last more than a year, and the 1 year rate. It is also important to separate the calculation for each division because hurdles rates influence project investment and repurchase decisions for the firm.
The company's restaurants, such as Roy Rogers and Hot Shoppes, provided 13 percent of 1987 sales and 16 percent of profits. It is simplified by adding latest two-year average and together. Similar to what our associates encounter every day. Each division estimates its cost of capital based on: Debt Capacity Cost of Debt Cost of Equity All of the above are. It is an appropriate method to use for calculating cash flows with risk that leads to estimate the risk of investment projects. Using this we see Marriott is funded using 60% debt and 40% equity.
The returns… 4186 Words 17 Pages Harvard Business School 9-298-101 Rev. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. So, during this workshop we calculated a different cost of capital for each one of the three divisions. Shurgard Self-Storage: Expansion to Europe 1. Suppose Marriott spun off its restaurant business as a completely separate firm with the target capital. Lodging: Cost of debt: For the calculations of the fixed rate debt, we are using the 30 year government bond rate instead of the 10 year. There may exist specific factors relevant to stock value and omitted here.
Table A provides the market value target leverage rates, the fraction of the debt at floating rate, the fraction at fixed rates, and the credit spread for Marriott as a whole and for each division. Q6-7: Ignoring the information from case, we download the current data for Marriott International, Inc. What would be the expected return on the equity of the separate lodging business? We will take Hilton Corporation of lodging as an example, In the above formula, we have already known the beta for M, R and L, we could calculate beta for contract services if we have the weight of asset for each division. Words: 2673 - Pages: 11. Sorry, but copying text is forbidden on this website! Lodging operations included 361 hotels and more than 100,000 rooms, and generated 41 percent of 1987 sales and 51 percent of profits.
Assume corporate tax rate being 40%. We estimated a shorter project lifespan for restaurants than for lodging, since we believe lodging is a long term investment while restaurants and contract services are short term investments. Finding limited partners on a hotel project is equivalent to selling private equity in the project Is there any reason to. Optimize the use of dept in the capital structure 4. What price should Radio One offer based on a discounted cash flow analysis? As of today, Marriott International Inc's weighted average cost of capital is 8.