Marriott cost of capital case solution excel. Marriott Corp. The Cost of Capital (Abridged) Case Study Solution and Case Analysis 2022-12-27

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The Marriott Cost of Capital case is a classic example of how a company can use financial analysis to make informed decisions about capital investment. In this case, Marriott International, a leading hotel and hospitality company, is considering expanding its portfolio by acquiring a new hotel chain. To make this decision, Marriott needs to estimate the cost of capital for the acquisition and determine whether it is financially viable.

One way to approach this problem is to use an Excel spreadsheet to perform a cost of capital analysis. This involves calculating the required rate of return for the acquisition, which is used to determine the value of the investment. The required rate of return represents the minimum return that an investor expects to receive on an investment. If the expected return is higher than the required rate of return, the investment is considered to be financially viable.

To calculate the required rate of return, we first need to gather some information about the company and the investment. This includes the company's financial statements, industry data, and market conditions. From this information, we can calculate the cost of equity and the cost of debt.

The cost of equity represents the return that shareholders expect to receive on their investment in the company. It is calculated using the capital asset pricing model (CAPM), which takes into account the risk-free rate of return, the market risk premium, and the company's beta. Beta is a measure of the company's volatility compared to the overall market.

The cost of debt represents the return that investors expect to receive on their investment in the company's debt. It is calculated by taking the company's interest rate and adding a risk premium to reflect the credit risk of the company.

Once we have calculated the cost of equity and the cost of debt, we can use the weighted average cost of capital (WACC) formula to determine the overall required rate of return for the acquisition. The WACC is calculated by weighing the cost of equity and the cost of debt according to the proportion of each in the company's capital structure.

In the Marriott Cost of Capital case, we can use this information to determine whether the acquisition is financially viable. If the expected return on the investment is higher than the required rate of return, the acquisition is likely to be a good financial decision. If the expected return is lower than the required rate of return, the acquisition may not be a good financial decision.

Overall, the Marriott Cost of Capital case illustrates the importance of using financial analysis to make informed decisions about capital investment. By using tools like Excel to perform a cost of capital analysis, companies can make sound financial decisions that help them grow and succeed in the long term.

Marriott Corp.: The Cost of Capital [10 Steps] Case Study Analysis & Solution

marriott cost of capital case solution excel

It is believed that this strategy is more appropriate that using a single firm-wide discount rate because the operations of the three divisions differ drastically. The cost of capital estimates the riskiness of an average investment within the company. This goal helps bring new hotels to fruition more cheaply. What is the weighted average cost of capital for Marriott Corporation as a whole? We need to be able to answer some basic questions before we can find out whether or not this type of occupancy is good. There is no full consensus of which proxy for riskfree rate should be used. The opportunity cost of capital is calculated using the WACC of Marriott.

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Marriott Corporation the Cost of Capital Case Study Solution for Harvard HBR Case Study

marriott cost of capital case solution excel

This is why most traditional real estate operators prefer properties that have a higher NPV. This research paper explores the possibilities of an individual living and working in Teaneck, New Jersey in the US. It is a subsidiary hotel to its parent company, Marriott International Inc, based in Washington DC. This segment of their enterprise continues to be a large part of their business, providing food services to many major airlines. The management fee is usually tied to the hotel's profit. Although the asset betas for the divisions have been calculated using the past five years data, it is believed that a larger pool of data should be used to estimate the market risk premium because the recent volatility in the markets might distort results. Then in the 1950s, Hot Shoppes, Inc.


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Marriott Corporation the Cost of Capital Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

marriott cost of capital case solution excel

Using a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business will lead to accept bad projects and reject profitable projects. Therefore, we calculate the appropriate cost of capital for Marriott as well as for each of the three divisions. This is just a sample partial case solution. Marriott has three separate divisions with dissimilar operations. They originally named it the Hot-Shoppe and began as a simple nine-seat root beer stand. Regarding the third purpose, Miller and Modigliani proposed that, in the presence of corporate taxes, the use of debt might raise the value of a corporation via the value contributed by the debt tax shield.

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Marriott Corporation The Cost of Capital Case Study Solution and Case Analysis

marriott cost of capital case solution excel

In the example, a project related to branding that will increase Marriott overall reputation and value 5 If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? Ruback Case Study Description Presents recommendations for hurdle rates of Marriott's divisions to select by discounting appropriate cash flows by the appropriate hurdle rate for each division. The rates that have been used to determine WACC are themselves prone to change over the passage of time. Bergerac Systems: The Challenge of Backward Integration Spreadsheet Supplement Pedigree Growth Strategy A School of One: Reimagining How Students Learn The Future of Iraq Project A Two Brattle Center: Mental-Health Clinic in Search of a Viable Operating Model Change at Whirlpool Corp. He would later rename the food stand The Hot Shoppe, adding Mexican food items to the menu. We use biggest available period — 1926 to 1987 — to estimate the average historical market risk premium.

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Marriott Corp. The Cost of Capital (Abridged) Case Study Solution and Case Analysis

marriott cost of capital case solution excel

Brushing up HBR fundamentals will provide a strong base for investigative reading. The repurchase of undervalued shares might not always be consistent with the growth objective. You have to recommend business unit level recommendations. As a result, the real estate operator does not gain from the occupancy. Cost of debt is 10. Does this make sense? What risk-free rate and risk premium do you use to calculate the cost of equity? Therefore, the annual fee will also be higher than the management fee.

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Marriot Corporation: The Cost of Capital (Abridged) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

marriott cost of capital case solution excel

The parks had replicas of the first Hot Shoppes. There is no agreed-upon measure of riskfree rate that investors could use. In order to calculate the beta, first of all the comparable information for the restaurant and lodging division has been used to calculate the unlevered asset beta with the respective leverage ratios of the comparables and then an average asset beta has been calculated. The actual number of rooms that you get might not be all that it is cracked up to be. Therefore, division with more than average risk would start accepting projects that would have been otherwise rejected if a more appropriate higher discount rate were used. In other words, arithmetic mean would be better at predicting the risk premium for the next year, while geometric mean would be superior at predicting the average risk premium over the next few years combined.

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Hbs Case “Marriott Corporation: The Cost Of Capital” Case Study Example

marriott cost of capital case solution excel

Hence we would use geometric average for risk free rate and risk premium for each of the three divisions, as given in exhibit 5 of the case. The second way to look at the difference between the book value and the realized value is by considering the lower percentage depreciation and the higher expenses. Marriott wants to remain a premier growth company. How do we link this with the Economic Value Added EVA approach? In order to calculate the cost of capital for the lodging and restaurant divisions, I will use the same formulas as in question 3. This objective mitigates the investment needed to launch new hotels, as the general partner is not required to make significant investments. For instance, while vacation homes and commercial properties have very little depreciation, most real estate does have a significant amount of depreciation. Does this make sense? It believed that focusing on maximizing shareholder value should be the underlying aim of every corporation, leading to stable growth and healthy profits.


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Marriott Corp Cost of Capital Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

marriott cost of capital case solution excel

This is basically the difference between the gross profit and the book value. The Marriott Corporation is divided into three sections, each of which has its own unique hurdle rate. It is always infiltrated among the Forbes Best companies to Work for list. It also provides starting ideas as fundamentals often provide insight into some of the aspects that may not be covered in the business case study itself. After all, if the hotel has low quality service, the guests won't stay.

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Marriot Corporation Case blog.sigma-systems.com

marriott cost of capital case solution excel

In order to calculate the cost of capital for the contract service division, I will use most of the formulas I stated in question number three. To figure out the price, you will need to estimate the net present value of the taxes paid on the property. Time line can provide the clue for the next step in organization's journey. The next thing to think about is the availability of rooms during the peak season. Willard Marriott and Alice S. How does Marriott use its estimate of its cost of capital? In contrast to the Treasury bond market, wherethe yields provide an estimate of the future returns on the security, there is no consensus estimate on the future expected return on the stock market. This leads to either missing details or poor sentence structures.

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Marriott Solution

marriott cost of capital case solution excel

They want to see exceptional customer service. In the US, the rate offered by US Treasury securities is often deemed riskfree because of the negligible default risk. However, there is a major statistical difference between the two approaches. One more factor that has a direct impact on the overall cost of ownership is the management fees. How do you measure the beta of each division? How do you measure the cost of debt for each division? This allows the new owner to get a fair price without considering these maintenance costs. The firm-wide cost of capital is probably a weighted average of the three individual costs of capital commensurate with each of the three divisions. Such increase in sales might bring in extra cash flow, resulting in underutilized debt capacity.

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