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need help with my Marriott corporation case study. All the questions on case study assignment have to beanswer. you have to look at the excel
need help with my Marriott corporation case study. All the questions on case study assignment have to beanswer. you have to look at the excel sheet to answer the questions
I also attach a possible solution on how the answer should look like.
Marriott Corp./Cost Harvard Business School Case #298-101 Case Software #XLS096 Copyright 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording or otherwisewithout the permission of Harvard Business School. Table A Market Value-Target Leverage Ratios and Credit Spreads for Marriott and Its Divisions Debt Percentage in Capital Fraction of Debt at Floating Fraction of Debt at Fixed Debt Rate Premium above Government Marriott 60% 40% 60% 1.30% Lodging Contract services Restaurants 74 40 42 50 40 25 50 60 75 1.10 1.40 1.80 Table B Maturity 30-year 10-year 1-year U.S. Government Interest Rates, April 1988 Rate 8.95% 8.72 6.90 Exhibit 1 Financial History, 1978-1987 (millions of dollars except per share data) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Summary of Operations Sales Earnings before interest expense and income taxes Interest expense Income before income taxes Income taxes Income from continuing operations a Net income Funds from continuing operations b $1,174.1 107.1 23.7 83.5 35.4 48.1 54.3 101.2 $1,426.0 133.5 27.8 105.6 43.8 61.8 71.0 117.5 $1,633.9 150.3 46.8 103.5 40.6 62.9 72.0 125.8 $1,905.7 173.3 52.0 121.3 45.2 76.1 86.1 160.8 $2,458.9 205.5 71.8 133.7 50.2 83.5 94.3 203.6 $2,950.5 247.9 62.8 185.1 76.7 108.4 115.2 272.7 $3,524.9 297.7 61.6 236.1 100.8 135.3 139.8 322.5 $4,241.7 371.3 75.6 295.7 128.3 167.4 167.4 372.3 $5,266.5 420.5 60.3 360.2 168.5 191.7 191.7 430.3 $6,522.2 489.4 90.5 398.9 175.9 223.0 223.0 472.8 Capitalization and Returns Total assets Total capitalc Long-term debt Shareholders' equity Long-term debt/total capital $1,000.3 826.9 309.9 418.7 37.5% $1,080.4 891.9 365.3 413.5 41.0% $1,214.3 977.7 536.6 311.5 54.9% $1,454.9 1,167.50 607.7 421.7 52.1% $2,062.6 1,634.50 889.3 516.0 54.4% $2,501.4 2,007.50 1,071.60 628.2 53.4% $2,904.7 2,330.70 1,115.30 675.6 47.9% $3,663.8 2,861.40 1,192.30 848.5 41.7% $4,579.3 3,561.80 1,662.80 991.0 46.7% $5,370.5 4,247.80 2,498.80 810.8 58.8% $0.25 0.29 0.026 2.28 2.43 183.6 13.9% $0.34 0.39 0.034 2.58 3.48 160.5 17.0% $0.45 0.52 0.042 2.49 6.35 125.3 23.8% $0.57 0.64 0.051 3.22 7.18 130.8 23.4% $0.61 0.69 0.063 3.89 11.70 132.8 20.0% $0.78 0.83 0.076 4.67 14.25 134.4 20.0% $1.00 1.04 0.093 5.25 14.70 128.8 22.1% $1.24 1.24 0.113 6.48 21.56 131.0 22.1% $1.40 1.40 0.136 7.59 29.75 130.6 20.6% Per Share and Other Data Earnings per share Continuing operationsa Net income Cash dividends Shareholders' equity Market price (year-end) Shares outstanding (millions) Return on average shareholders' equity Source: Company reports a The company's theme park operations were discontinued in 1984. Funds provided from continuing operations consist of income from continuing operations plus depreciation, deferred income taxes, and other items not currently affecting working capital. b Total capital represents total assets less current liabilities. c $1.67 1.67 0.17 6.82 30.00 118.8 22.2% Exhibit 2 Financial Summary by Business Segment, 1982-1987 (millions of dollars) 1982 1983 1984 1985 1986 1987 Lodging Sales Operating profit Identifiable assets Depreciation Capital expenditures $1,091.7 132.6 909.7 22.7 371.5 $1,320.5 $1,640.8 $1,898.4 $2,233.1 $2,673.3 139.7 161.2 185.8 215.7 263.9 1,264.6 1,786.3 2,108.9 2,236.7 2,777.4 27.4 31.3 32.4 37.1 43.9 377.2 366.4 808.3 966.6 1,241.9 Contract Services Sales Operating profit Identifiable assets Depreciation Capital expenditures 819.8 51.0 373.3 22.9 127.7 950.6 71.1 391.6 26.1 43.8 1,111.3 86.8 403.9 28.9 55.6 1,586.3 118.6 624.4 40.2 125.9 2,236.1 154.9 1,070.2 61.1 448.7 2,969.0 170.6 1,237.7 75.3 112.7 547.4 48.5 452.2 25.1 199.6 679.4 63.8 483.0 31.8 65.0 707.0 79.7 496.7 35.5 72.3 757.0 78.2 582.6 34.8 128.4 797.3 79.1 562.3 38.1 64.0 879.9 82.4 567.6 42.1 79.6 Restaurants Sales Operating profit Identifiable assets Depreciation Capital expenditures Source: Company reports Exhibit 3 Information on Comparable Hotel and Restaurant Companies Arithmetic Average Returna Geometric Average Returna 22.4% 21.4% 0.97 41% $6.52 Hilton Hotels Corporation (Owns, manages, licenses hotels; operates casinos) 13.3 12.9 0.88 14 0.77 Holiday Corporation (Owns, manages, licenses hotels, restaurants; operates casinos) 28.8 26.9 1.46 79 1.66 La Quinta Motor Inns (Owns, operates, licenses motor inns) -6.4 -8.6 0.38 69 0.17 Ramada Inns (Owns, operates hotels, restaurants) 11.7 2.8 0.95 65 0.75 Church's Fried Chicken (Owns, franchises restaurants, gaming businesses) -3.2 -7.3 0.75 4 0.39 Collins Foods International (Operates Kentucky Fried Chicken franchise, moderately priced restaurants) 20.3 17.7 0.60 10 0.57 Frisch's Restaurants (Operates, franchises restaurants) 56.9 49.7 0.13 6 0.14 Luby's Cafeterias (Operates cafeterias) 15.1 12.8 0.64 1 0.23 McDonald's (Operates, franchises, services restaurants) 22.5 21.3 1.00 23 4.89 Wendy's International (Operates, franchises, services restaurants) 4.6 1.08 21 1.05 Company and Nature of Business Marriott Corporation (Owns, operates, manages hotels, restaurants, airline and institutional food services) Equity Betab -1.4 Source: Casewriter's estimates. a Calculated over period 1983-1987. Estimated by ordinary least-squares regression using daily data over 1986-1987 period. b Book value of debt divided by the sum of the book value of debt plus the market value of equity. c Market Leveragec 1987 Revenues ($ billions) Exhibit 4 Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987 Arithmetic Average Geometric Average Standard Deviation 1926-1987 3.54% 3.48% 0.94% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 1.01 3.67 7.80 10.32 6.16 5.46 1.00 3.66 7.77 10.30 6.16 5.46 0.40 0.56 0.83 0.75 0.19 0.22 1926-1987 4.58% 4.27% 7.58% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 4.14 2.39 1.95 17.85 24.44 -2.69 4.04 2.22 1.69 16.82 24.44 -2.69 4.17 6.45 11.15 14.26 17.30 1926-1987 5.24% 4.93% 6.97% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 4.82 3.05 2.70 18.96 19.85 -0.27 4.76 2.86 2.39 17.83 19.85 -0.27 3.45 6.04 10.87 14.17 8.19 1926-1987 12.01% 9.90% 20.55% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 10.90 11.87 14.81 15.49 18.47 5.23 7.68 10.26 13.95 14.71 18.47 5.23 27.18 13.57 14.60 13.92 17.94 30.50 Short-Term Treasury Bill Returns Long-Term U.S. Government Bond Returns 10.28 Long-Term, High-Grade Corporate Bond Returns 9.64 Standard & Poor's 500 Composite Stock Index Returns Source: Casewriter's estimates based on data from the University of Chicago's Center for Research in Security Prices. Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates, 1926-1987 Arithmetic Average Geometric Average Standard Deviation 1926-1987 8.47% 6.42% 20.60% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 9.89 8.20 7.01 5.17 21.31 -0.23 6.68 6.60 6.18 4.41 12.31 -0.23 1926-1987 7.43% 5.63% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 6.76 9.48 12.86 -2.36 -5.97 7.92 3.64 8.04 12.26 -2.11 -5.97 7.92 1926-1987 6.77% 4.97% 1926-1950 1951-1975 1976-1980 1981-1985 1986 1987 6.08 8.82 12.11 -3.47 -1.38 5.50 2.92 7.40 11.56 -3.12 -1.38 5.50 Spread between S&P 500 Composite Returns and Short-Term Treasury Bill Returns 27.18 13.71 14.60 14.15 17.92 30.61 Spread between S&P 500 Composite Returns and LongTerm U.S. Government Bond Returns 20.78% 26.94 14.35 15.58 13.70 14.76 35.35 Spread between S&P 500 Composite Returns and LongTerm, High-Grade Corporate Bond Returns 20.31% Source: Casewriter's estimates based on data from the University of Chicago's Center for Research in Security Prices. 26.70 13.15 15.84 13.59 14.72 34.06 What is Marriott's WACC What is Lodging's WACC Step 1 - Unlever Beta What is Restaurant's WACC Step 1 - Lever Beta Step 1 - Lever Beta Levered Equity Beta Actual Debt / Value 0.97 41.00% Unlevered Beta Target Debt/Value Actual Equity / Value Levered Equity Beta 59.00% 0.97 Target Leverage Beta Unlevered Beta 0.57 Step 2 - Lever Beta to Target Leverage Rate What is Contract Service's WACC 0.42 74.00% 1.62 Step 2 - Equity Cost Step 1 - Lever Beta Unlevered Beta Target Debt/Value 0.74 42.00% Target Leverage Beta 1.28 Step 2 - Equity Cost Unlevered Beta Target Debt/Value 0.83 40.00% Equity Beta 1.39 Step 2 - Equity Cost Re = Riskless Rate + Beta(Risk Premium) Re = 8.95+ 1.62(7.43) Unlevered Beta Target Debt/Value 0.57 0.6 Target Leverage Beta Re = Riskless Rate + Beta(Risk Premium) Re = 8.72+ 1.28(7.43) Re = Riskless Rate + Beta(Risk Premium) Re = 8.95+ 1.39(7.43) Re = Re = Re = 20.99 18.23 19.28 1.43 Step 3 - Debt Rate Rd= 30 Year USG+ 30 Year Debt Prem Rd= 8.95% 1.10% Rd= 10.05% Step 3 - Equity Cost Re = Riskless Rate + Beta(Risk Premium) Re = 8.95+ 1.43(7.43) Re = Rd= 30 Year USG+ 30 Year Debt Prem Rd= 8.72% 1.80% Rd= 10.52% Step 4 - WACC Step 3 - Debt Rate Rd= 30 Year USG+ 30 Year Debt Prem Rd= 8.95% 1.40% Rd= 10.35% Step 4 - WACC 19.57 Step 4 - Debt Rate Rd= 30 Year USG+ 30 Year Debt Prem Rd= 8.95% 1.30% Rd= 10.25% Step 5 - WACC WACC = WACC = WACC = WACC = Step 4 - WACC Step 3 - Debt Rate Re(E/V) + Rd(D/V)(1-tax rate) 19.57(40%)+ 10.25(60%)(66%) 7.83% 4.06% 11.89% WACC = WACC = WACC = WACC = Re(E/V) + Rd(D/V)(1-tax rate) 20.99(26%)+ 10.05(74%)(66%) 5.46% 4.91% 10.37% WACC = WACC = WACC = WACC = Re(E/V) + Rd(D/V)(1-tax rate) 18.20(58%)+ 10.52(42%)(66%) 10.56% 2.92% 13.47% WACC = WACC = WACC = WACC = Re(E/V) + Rd(D/V)(1-tax rate) 19.28(60%)+ 10.35(40%)(66%) 11.57% 2.73% 14.30% WILMINGTON UNIVERSITY COURSE TITLE: Advanced Financial Analysis COURSE NUMBER: MBA 7294 FACULTY MEMBER: Dr. Joseph A. Weeks Jr. Week #2 Case Study - Marriott Corporation Case Study Questions: 1. Define WACC. a. How is it calculated? b. How can organizations utilize WACC within capital budgeting decisions? 2. How does Marriott use estimated cost of capital within their capital budgeting process? Does this make sense? 3. Calculate Marriott's weighted average cost of capital (as a whole)? a. What risk-free rate and risk premium did you use to calculate the cost of equity? b. How did you measure Marriott's cost of debt? c. Did you use arithmetic or geometric averages to measure rates of return? Why? 4. If Marriott calculated their WACC incorrectly for evaluating investment opportunities, what would the impact on their annual development in the scenarios below (determine the actual financial impact in $'s for each); a. If estimated WACC was 10%; and actual WACC was 12%? b. If estimated WACC was 10%; and actual WACC was 8%? 5. Calculate the cost of capital for the lodging and restaurant divisions of Marriott? a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers? b. How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? c. How did you measure the beta of each division? 6. Calculate the cost of capital for Marriott's contract services division? a. How can you estimate its equity costs without publicly traded comparable companies? Case Study Assumptions: 1. Beta will need to be adjusted to account for the difference between actual and target debt ratio by unlevering beta to determine an unlevered asset beta and levering beta at the target debt rate. Case Study Analysis Papers grading rubric Grading Criteria Define WACC and discuss how WACC is calculated. Discuss how Marriott utilize WACC within their capital budgeting decisions? Does this approach maximize shareholder value? Develop the WACC for Marriott Corporation Calculate the impact of an error in Marriott Corporation's WACC; if estimated WACC was 10%; and actual WACC was 12% & if estimated WACC was 10%; and actual WACC was 8%? Develop the WACC for Marriott's lodging division Develop the WACC for Marriott's restaurant division Develop the WACC for Marriott's contract services division Proper spelling, punctuation, and APA Formatting Total Maximum Points 5 15 15 10 15 15 15 10 100
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