Marriott Cost of Capital
Our objective was to find the hurdle rates for Marriott’s three divisions and for the firm as a whole. Marriott should find the hurdle rates for its divisions separately because its divisions operate in separate industries and therefore face different business risks. Marriott’s vice president says that increasing the hurdle rate by 1% would decrease the present value of project inflows by 1%. Since finding appropriate hurdle rates is critical to accepting or rejecting projects, Marriott should be precise by calculating and using division-specific rates on division-specific projects.
We used the WACC method so that our hurdle rates would reflect appropriate cost of debt and cost of equity, as explained in our subsequent analysis. We found Marriott’s hurdle rates: 8.646% for hotels, 10.94% for restaurants, 11.094% for contracts, and 9.688% for the entire company. Marriott should use the division-specific hurdle rates when evaluating division-specific projects. Using the overall WACC to evaluate a project in the restaurant industry, for example, could cause Marriott to incorrectly accept a project, which would destroy wealth.
Our analysis also led us to evaluate Marriott’s four financial growth objectives. First, we found that by managing instead of owning hotel assets, Marriott was able to hedge its risks in the currently volatile economy. Second, we were concerned that Marriott’s strategy of maximizing shareholder wealth by treating its projects like “similar little boxes” instead of using division-specific hurdle rates would decrease shareholder value. Third, we believe that Marriott’s practice of setting a high target interest coverage ratio instead of a D/E ratio might prevent
We used the WACC method so that our hurdle rates would reflect appropriate cost of debt and cost of equity, as explained in our subsequent analysis. We found Marriott’s hurdle rates: 8.646% for hotels, 10.94% for restaurants, 11.094% for contracts, and 9.688% for the entire company. Marriott should use the division-specific hurdle rates when evaluating division-specific projects. Using the overall WACC to evaluate a project in the restaurant industry, for example, could cause Marriott to incorrectly accept a project, which would destroy wealth.
Our analysis also led us to evaluate Marriott’s four financial growth objectives. First, we found that by managing instead of owning hotel assets, Marriott was able to hedge its risks in the currently volatile economy. Second, we were concerned that Marriott’s strategy of maximizing shareholder wealth by treating its projects like “similar little boxes” instead of using division-specific hurdle rates would decrease shareholder value. Third, we believe that Marriott’s practice of setting a high target interest coverage ratio instead of a D/E ratio might prevent