Marriot Case Study
Marriot Case Study
AF 325
12/12/11
1. The divisional hurdle rates at Marriott have a significant impact on the firm’s financial and operating strategies. For every 1% increase in the hurdle rate there would be a 1% decrease in the net present value of projects inflows.
It makes sense to institute these divisional hurdle rates in each of the company’s three divisions since it will assure that projects taken on will have a positive net present value. It is essential for Marriott to make sure their projects stay profitable. The establishing of the hurdle rates is key in achieving this. It is to be noted that if the hurdle rates were to be increased the companies growth will decrease. In vice versa if Marriott institutes lower hurdle rates the growth will increase.
2. Below is how we calculated the WACC for The Marriot. BL= 1.11
Cost of Debt (rD): 8.72 + 1.30= 10.02
CapM/Cost of Equity: rf + (mkt risk prem)BL .0872 + (.1201-.0458) 1.11 = .1697 or 16.97%
WACC: (1-T) rD (D/V) + rE (E/V) (1-.44) .1002(.60/1) + .1697(.40/1) = .033667 + .067880 = .101547 or 10.15%
3. In using Marriott’s WACC to value an investment you must use an investment that has the same level of risk and/or be in the same risk class as Marriott. The proposed investments must be comparable to the risk taken in Marriott’s present operations.
4. It is not feasible for Marriott to use a single hurdle rate for evaluating investment opportunities in each of their divisions. Each of their divisions represents a different risk. Each division also represent different weighted average capital costs which should be used to asses the value of incoming projects. It would be inefficient to use one hurdle rate since it is easy to see that Marriott’s lodging is much more profitable than the Marriott restaurants and therefore less risky. If Marriott uses a single hurdle corporate over time it will build up miscalculations, negative net present
AF 325
12/12/11
1. The divisional hurdle rates at Marriott have a significant impact on the firm’s financial and operating strategies. For every 1% increase in the hurdle rate there would be a 1% decrease in the net present value of projects inflows.
It makes sense to institute these divisional hurdle rates in each of the company’s three divisions since it will assure that projects taken on will have a positive net present value. It is essential for Marriott to make sure their projects stay profitable. The establishing of the hurdle rates is key in achieving this. It is to be noted that if the hurdle rates were to be increased the companies growth will decrease. In vice versa if Marriott institutes lower hurdle rates the growth will increase.
2. Below is how we calculated the WACC for The Marriot. BL= 1.11
Cost of Debt (rD): 8.72 + 1.30= 10.02
CapM/Cost of Equity: rf + (mkt risk prem)BL .0872 + (.1201-.0458) 1.11 = .1697 or 16.97%
WACC: (1-T) rD (D/V) + rE (E/V) (1-.44) .1002(.60/1) + .1697(.40/1) = .033667 + .067880 = .101547 or 10.15%
3. In using Marriott’s WACC to value an investment you must use an investment that has the same level of risk and/or be in the same risk class as Marriott. The proposed investments must be comparable to the risk taken in Marriott’s present operations.
4. It is not feasible for Marriott to use a single hurdle rate for evaluating investment opportunities in each of their divisions. Each of their divisions represents a different risk. Each division also represent different weighted average capital costs which should be used to asses the value of incoming projects. It would be inefficient to use one hurdle rate since it is easy to see that Marriott’s lodging is much more profitable than the Marriott restaurants and therefore less risky. If Marriott uses a single hurdle corporate over time it will build up miscalculations, negative net present