Marriott Corporation
Marriott Corporation
Jacob Piquette
Jingjin Cen
Chen Huo
Wenkao Wu
Accurately Measuring Debt Capacity For Marriott Corporation
While management was correct in some aspects of measuring debt capacity for Marriott Corporation, the method used to obtain the ratio of 6.64 did not include the debt from the previous repurchase, grossly overstating the ratio and leading to believe that Marriott Corporation had a large unsused portion of debt capacity. This is shown in Exhibit 5. After thorough analysis and a different approach to finding the debt capacity, it is concluded that the actual debt capacity for Marriott Corporation is 3.94 EBIT-adjusted/net interest.
To come up with the actual debt capacity for Marriott Corporation, the EBIT-adjusted/net interest ratio was still used, but the numbers supporting the ratio were altered. From Exhibit 5, we get the total debt of Marriott at the end of 1979. Total debt is defined as the sum of short-term loan, current portion of long-term debt, senior debt and capital leases. The average market price of Marriott in 1979 was $14.9/share, and the interest rate for Baa corporate debt was 12%. It was assumed that Marriott repurchased stock at the price of $15/share using 12% debt financing. Using the net interest before the repurchase, which was $27.8 million, it is concluded that adjusted EBIT was $184.59 million.
In 1979, additional debt from the repurchase of stock $159 million, adding this to the debt of the original figures, the new debt is totaled at $583.83 million. Using a 12% interest rate from the new debt and finding the new numbers for the ratio, the new adjusted EBIT-adjusted/net interest ratio is 3.94. This figure hits below Marriott Corporations benchmark of 5.
Returning Shareholders’ Capitol
A. New Debt Capacity And Repurchasing Shares
If the firms stock is in a position to be affected by dilution, repurchasing shares may be a solution. This would allow Marriott Corporation to maintain its ability to make
Jacob Piquette
Jingjin Cen
Chen Huo
Wenkao Wu
Accurately Measuring Debt Capacity For Marriott Corporation
While management was correct in some aspects of measuring debt capacity for Marriott Corporation, the method used to obtain the ratio of 6.64 did not include the debt from the previous repurchase, grossly overstating the ratio and leading to believe that Marriott Corporation had a large unsused portion of debt capacity. This is shown in Exhibit 5. After thorough analysis and a different approach to finding the debt capacity, it is concluded that the actual debt capacity for Marriott Corporation is 3.94 EBIT-adjusted/net interest.
To come up with the actual debt capacity for Marriott Corporation, the EBIT-adjusted/net interest ratio was still used, but the numbers supporting the ratio were altered. From Exhibit 5, we get the total debt of Marriott at the end of 1979. Total debt is defined as the sum of short-term loan, current portion of long-term debt, senior debt and capital leases. The average market price of Marriott in 1979 was $14.9/share, and the interest rate for Baa corporate debt was 12%. It was assumed that Marriott repurchased stock at the price of $15/share using 12% debt financing. Using the net interest before the repurchase, which was $27.8 million, it is concluded that adjusted EBIT was $184.59 million.
In 1979, additional debt from the repurchase of stock $159 million, adding this to the debt of the original figures, the new debt is totaled at $583.83 million. Using a 12% interest rate from the new debt and finding the new numbers for the ratio, the new adjusted EBIT-adjusted/net interest ratio is 3.94. This figure hits below Marriott Corporations benchmark of 5.
Returning Shareholders’ Capitol
A. New Debt Capacity And Repurchasing Shares
If the firms stock is in a position to be affected by dilution, repurchasing shares may be a solution. This would allow Marriott Corporation to maintain its ability to make