What type of investments would you value using Marriott’s WACC? ........................ 6 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? ......... 7 6. What is the cost of capital for the lodging and restaurant divisions of Marriott?
The company regularly calculated “warranted equity value” for its common shares and repurchased its stock whenever the market price fell substantially below that value. The cost of capital for Marriott and for each of the three divisions individually could differ in each of the divisions resulting in varying cost of capital. In order for Marriott to only invest in a project, the internal rate of return (IRR) needs to be greater than the hurdle rate. To accurately determine the opportunity cost of capital. We will apply the cost of capital as the hurdle rate to discount future cash flows for the investment projects of the firm’s three divisions.
This can affect the growth of the company. By adopting IFRS, U.S. will also be adopting a big risk, if the quality of the new standards do not match the U.S. GAAP. Looking at the various possibilities of adopting IFRS in the U.S, it can be said that it is a big decision to be made. Although, in my opinion we should adopt to IFRS in financial reporting only if the benefits outweigh the costs of transition. If adopting IFRS benefit monetarily and make the transition easy for the investors, auditors, and the public companies, then there should be no harm in accepting it for financial reporting
Everything being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC means a decrease in valuation and a higher risk. A firms WACC is a very important both to the stock market for stock valuation purposes and to the company's management for capital budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the company's WACC will generate additional free cash flow and create positive NPV for stockholders. Since the WACC is the minimum rate of return required, the managers in the company should invest in the projects that generate returns in excess of the WACC. WACC is set by the investors (or markets), not by managers.
FI515_Homework1 Mini Case (p. 45) a. Why is corporate finance important to all managers? Successful companies must be able to generate enough cash to compensate the investors who provided the necessary capital. In order to do this managers must be able to evaluate any proposal, whether it relates to marketing, production, strategy, or any other area, and implement only the projects that add value for your investors. For this, you must have expertise in finance.
Currently Marriott uses working average cost of capital (WACC) to determine net present value (NPV) of projects. If the WACC rates increase, growth would reduce and if WACC rates were to decrease, growth would accelerate. Marriott also uses WACC to determine incentive compensation levels for senior executive management. This is the formula to calculate the WACC. The WACC for Marriott and the Key Divisions are as follows.
Regarding Mr. Buffett`s investment philosophy, my disagreement points lays mainly in the per-share basis which he truly believes, diversification and risk and discount rate points. First of all, in my opinion, Mr. Buffett should use both per-share basis and complete value to give a better insight to his investors. Secondly, I agree with Mr. Buffet`s ideas when it regards that we must invest in our expertise areas, but I disagree that a moderate portfolio can bring damages to the investor or even that it might seem as ignorance. Finally, Mr. Buffett is right to use the CAPM method to assess his investments, but using the 30-year U.S treasury rate seems a little bit mistaken even if he is a non-risk taker or his companies are not financed by debt. In Mr. Buffett`s opinion, intrinsic value is the present value of the future expected performance.
c. Optimize the use of debt in the capital structure: Relying heavily on equity would increase the cost to investors whereas relying too much on debt would put the business in a precarious position. Marriott is in good financial standing and is expected to perform well in the future. As a result, it can obtain debt financing at a lower cost as compared to equity financing. By optimizing the use of debt in the capital structure, Marriott can use the proceeds borrowed at a lower interest rate to invest in projects with
Case Report #6: Marriott Corporation Memo From: Subject: Marriott Corporation : The Cost of Capital Problem: Marriott Corporation needs to determine suitable hurdle rates for each of its three divisions. These rates will be used to discount cash flows of potential future projects. Options: 1. Compute the WACC under the classical tax system for the company as a whole and for each division of the company 2. Present recommendations for hurdle rates of Marriott's different divisions to select by discounting appropriate cash flows by the appropriate hurdle rate for each division Recommendation: Given the policies and strategies related with hurdle rates and cost of capital, Marriot Corporation should follow their target debt/value structure because it will minimize their weighted average cost of capital.
Rolls-Royce numbers are 16.81% and 83.19 % respectively. In both cases we see that firms prefer to use their own capital. We cannot tell with certainty why this structure was chosen, but we can look for example at the level of liquidity. Unilever has 93% (cash to current liabilities). We can conclude that the firm has enough cash to meet its obligations and able to generate cash flow to use it for project financing when needed.