Cooperate FinanceValuation of Airthread Connections
Essay by georgehahaha • January 23, 2019 • Coursework • 1,126 Words (5 Pages) • 458 Views
Q1. Are the four components of Marriott’s financial strategy consistent with its growth objective?
The growth objective of Marriot would be to remain a premier growth company. The four components of the company’s financial strategy should be analyzed separately as following:
 Manage rather than own hotel assets
By selling the hotel assets to limited partners while retaining operating control as the general partner under a longterm management contract, Marriott started running its business in a light asset model, which can reduce its working capital needs as well as generate huge amount cash to invest in other projects to enhance its profitability. This component is consistent with its growth objective;
 Invest in projects that increase shareholder value;
This one means the company would keep investing in projects with positive NPV. It is consistent with its growth objective. However, the agency costs should be considered since sometimes (maybe many times) the interest of shareholders does not go the same way with that of creditors. When this happens, company might implement a profitable plan with great risk and small chance in succeed;
 Optimize the use of debt in the capital structure
To optimize the use of debt financing, the company can reach to a balance of the benefit of enjoying tax shield and leverage and the potential financial stress caused by the fixed cash outflow (interest) and huge amount to repayment. It is consistent to the growth objective;
 Repurchase undervalued shares
By repurchasing undervalued shares, the company actually spends its cash in rewarding its shareholder and boosting its stock price in shortterm. If doing so, the company might miss some opportunities to invest in profitable projects. This is not consistent with its growth objective.
Q2: Take Marriott’s tax rate as 34%, what is the weighted average cost of capital for Marriott’s Corporation?
 What riskfree rate and risk premium did you use to calculate the cost of equity?
Use 30year US Government bond rate and S&P returns over it (Geometric averages)
Riskfree rate is the 30year maturity U.S. Government Interest Rate 8.95% (Table B), because Marriott’s main business is hotel and it requires longterm investment. We will use more conservative number of 30 years instead of 10 years.
Risk premium is the spread between S&P 500 composite returns and longterm U.S. government bond returns from 19261987 5.63% (Exhibit5).
 How did you measure Marriott’s cost of debt?
Cost of debt=risk free rate + spread cost rate
Riskfree rate is the 30year maturity U.S. Government Interest Rate 8.95% (Table B);
The spread cost rate is 1.3% (Table A)
Cost of debt=8.95%+1.3%=10.25%
Cost of equity =8.95+5.63*0.97=14.41%
WACC=14.41%*0.4+10.25*(134%)*0.6=9.82%
 Did you use arithmetic or geometric averages to measure rates of return?
Geometric for longterm return, since the return should be compounded annually.
Shortterm return should be annual and we use arithmetic.
Q3. 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?
It depends on the cost of capital of every division at the company. However, based on the information the case provides, the costs would definitely be different, probably around the WACC of the whole company. If using a single corporate hurdle rate for evaluating investment opportunities in each division, then some projects in lower risk departments might be rejected since the calculated NPV would be less due to the higherthanactual WACC used as a discount rate. On the other hand, some projects in higher risk departments with positive NPV would be accepted due to the lowerthanactual WACC.
Q4. What is the cost of capital for the lodging and restaurant divisions of Marriott?
 What riskfree fate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?
Lodging: Marriott used the cost of longterm debt for its lodging costofcapital calculations.
The riskfree rate= 8.95% (Table B).
The spread cost rate=1.1% (Table A)
Restaurants: Marriott used the cost of shortterm debt for its restaurants costofcapital calculations.
The riskfree rate= 6.9% (Table B).
The spread cost rate=1.8% (Table A)
 How did you measure the cost of debt for each division? Should the debt cost differ across divisions? Why?
Marriott has three different independent departments and these departments used different maturity cost of debt for its costofcapital calculations. Therefore, we need to measure the debt cost by different departments.
Lodging: Marriott used the cost of longterm debt for its lodging costofcapital calculations.
The riskfree rate= 8.95% (Table B).
The spread cost rate=1.1% (Table A)
Pretax cost of debt=8.95%+1.1%=10.05%
Aftertax cost of debt=(1t)*pretax cost of debt=(134%)*10.05%=6.63%
Contract services: Marriott used the cost of shortterm debt for its contract services costofcapital calculations.
The riskfree rate= 6.9% (Table B).
The spread cost rate=1.4% (Table A)
Pretax cost of debt=6.9%+1.4%=8.3%
Aftertax cost of debt=(1t)*pretax cost of debt=(134%)*8.3%=5.48%
Ref. Restaurants: Marriott used the cost of shortterm debt for its restaurants costofcapital calculations.
The riskfree rate= 6.9% (Table B).
The spread cost rate=1.8% (Table A)
Pretax cost of debt=6.9%+1.8%=8.7%
Aftertax cost of debt=(1t)*pretax cost of debt=(134%)*8.7%=5.74%
 How did you measure the beta of each division?
1. Adjust Marriott’s beta based on leverage
Considering the fact that overall Marriott can gain funding based on its beta(0.97), adjust the beta for each division according to its leverage.
 Debt  Equity  Beta 
Marriott  0.6  0.4  0.97 


 (Unlevered=0.487) 
Lodging  0.74  0.26  1.403069192 
Restaurants  0.42  0.58  0.840408941 
βU=βL÷(1＋(1－t)×D/E) 
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