Marriott Corporation Essay

While instruction was counteract in some aspects of measuring debt capacity for Marriott mountain, the method used to obtain the ratio of 6.64 did non include the debt from the previous repurchase, grossly overstating the ratio and leading to accept that Marriott Corporation had a large unsused ingredient of debt capacity. This is shown in Exhibit 5. After thorough analysis and a different approach to finding the debt capacity, it is reason that the actual debt capacity for Marriott Corporation is 3.94 EBIT-ad unlessed/ brighten matter to. To come up with the actual debt capacity for Marriott Corporation, the EBIT-adjusted/net interest ratio was still used, but the numbers supporting the ratio were altered. From Exhibit 5, we get the total debt of Marriott at the end of 1979.Total debt is defined as the sum of short-term loan, current portion of long-term debt, precedential debt and capital leases. The average market expense of Marriott in 1979 was $14.9/share, and the inter est rate for Baa corporate debt was 12%. It was assumed that Marriott repurchased stock at the price of $15/share using 12% debt financing. Using the net interest before the repurchase, which was $27.8 million, it is concluded that adjusted EBIT was $184.59 million. In 1979, additional debt from the repurchase of stock $159 million, adding this to the debt of the original figures, the untested debt is totaled at $583.83 million. Using a 12% interest rate from the impertinently debt and finding the new numbers for the ratio, the new adjusted EBIT-adjusted/net interest ratio is 3.94. This figure hits below Marriott Corporations benchmark of 5. reverting shareowners CapitolA. New Debt Capacity And Repurchasing SharesIf the homes stock is in a position to be affected by dilution, repurchasing shares whitethorn be a solution. This would allow Marriott Corporation to maintainits ability to make decisions utilizing all the available resources. This was antecedently genius by Marriott in 1979 with the repurchase of 5 million shares. With the new debt capacity ratio at 3.94, a repurchase share pick is not recommended as Marriott Corporation does not have the exorbitance debt capacity previously thought to carry out this alternative. Performing a secondary scenario analysis, suppose Marriott had just enough debt capacity, which heart new adjusted EBIT/Net interest ratio equals 5.Using this number, the repurchase price should be $7.17 so that Marriott Corporation could utilize its debt capacity fully. Using this number, only 10.6 million shares could be purchased resulting in the repurchase of stock alternative not taking place as expected. This would result in investors to believe that Marriott Corporation has hit its growth limit, as the repurchase strategy would not have enough wisdom to persuade investors through EPS and ROE that Marriott Corporation is still a growing company. It is concluded that repurchasing shares is not the correct alternative, even wi th a benchmark debt capacity of 5.B. Increasing DividendsWhile increasing dividends would be a straightforward alternative to satisfy investors, it is not without its repercussions as well. If dividends were to be paid out, a gradual steady enlarge over many course of studys would be the best alternative, as one lump sum defrayment does not resolve the debt capacity issue, as well as signify to investors negative signs if Marriot Corporation were to one year pay a high divided and the next decrease that same dividend.Typically, when a firm increases dividends, that level of dividends must be maintained to satisfy shareowners, as well as institutional investors and mind- treated investors. Another factor to consider when analyzing this alternative, is that although Marriott Corporation has had high growth is recent years, compared to competitors, the stock price, return on equity, as well as earnings per share are low, as seen in Exhibit 11 and Exhibit 12. Although paying divide nds in conjunction with a to a greater extent than value creating alternative could be used, totally paying out dividends is not recommended.Promote GrowthA. Diversify Through AcquisitionMarriott also has the alternative to invest in a new firm. MarriottCorporation has a competitive advantage that could be passed on if they were to acquire existing companies. This competitive advantage is obtained through their competitive expertise of the industry, as well as proven higher moving in rate than their competition. The companys assets are mainly real-estate based which means that they should put a premium on the land that they can get by acquiring a new firm. There is relatively little risk in acquiring another firm as well, because their sales can be seen and analyzed before Marriott Corporation makes an offer. correspond to Exhibit 10 in that location is a very high price to be paid for a new hotel. Prices paid for hotels, however, did not rise at all from 1975-1978 and number of offers stayed relatively reasonable.From 1977-1978 acquiring another hotel chain actually became a better deal at several data points. Market price/book value dropped easily meaning that hotels became a much better value for the amount of assets they had. Market price/cash stop is lower as well, with average return on equity rising as well. One caution is that buying hotel chains in the market value of $25-$250 million had a much higher postage offer/ market value in 1978 up from 39.64% to 60.05%, while hotel chains over 250 million dropped by virtually as much. Although there is a risk involved with buying any company or hotel, hotels which are thoroughly analyzed beforehand could be excellent ways to promote growth in the Marriott Corporation. Hotels that would be purchased would be proven to succeed in their respective locations. B.Accerlerate Expansion of Existing BusinessMarriot has 2 options about the operation of hotel chains. First, it can own the hotel and enjoy th e profit valuation reserve. Second, it can fail the hotel but maintain management contracts so it controls the operation of such units. Following is the detailed decomposition of costs associated with two options. According to Exhibit 9, in 1978 the typical cost for a hotel room consists of improvement cost, furniture, fixtures and equipment cost, land cost, pre-opening cost and run cost. For an owned hotel, Marriot had to pay the total cost for running the property, but if it is managed, Marriot only had operating cost because the emptor was responsible for the maintenance. In an attempt to emphasize more on return on invested capital quite an than margins, Marriot sold some of their existing hotels and retainedmanagement contract to free up capital. Managed hotels had operating margin of 8%-10%, while owned had 15%. We assume 10% margin for managed hotels and 15% for owned hotels. To fix when to sell the property, we analyze the remaining present value of future cash flow o f a hotel at different point of time in its life cycle.We further assume that when the hotel is sold, the selling price is set so that present value of future cash flow equals the 10% margin. We assume $50 revenue per room night of a typical 150-room hotel, and one year has 360 days. Sales level for each year in the life cycle connects to the occupancy rate. From the graph in Exhibit 9, we get different occupancy rate for the whole life cycle. It reaches the peak 100% at year 8, and later year 10, it declines almost linearly to 10% in year 30. We can see that if Marriot sells the hotel before opening, the selling price would be $1.63 million at time 0. After the peak, assuming year 9, the selling price would be $ 1.55 million.The goo value of PV is at year 4, which has $2.85 million in PV at 15% margin. Marriot Corporation would free up more capital if it sells the hotel before opening, but instead it would lose more operating profit. If Marriot is short of capital, it could sell the hotel up-front so that the freed up capital can be invested in other profitable projects. Selling after the peak is a good choice if Marriot wants to enjoy the increasing operating profit before the peak. Shareholder value can be added if the return on freed-up capital exceeds the profit loss from selling the property. testimonyAfter the analysis of the different alternatives, and correctly measuring debt capacity, it is concluded that Marriott Corporation does not return shareholder capital but instead promotes growth of the existing company. This provides benefits in a couple of ways. By promoting growth, Marriott Corporation can signal to investors that the firm is still growing, providing incentives for institutional investors as well as individual investors, resulting in a positive market outlook for Marriott Corporation.Also, with the actual debt capacity measured, it is shown that Marriott Corporation does not have the additional capacity to undertake those alternatives, resulting in even more negatives in the future. By promoting the existing business, Marriott Corporation has more control over their financial prospects, through the possibilities of merging or opening orbuilding more hotels. This would provide positive NPV for Marriott Corporation, and perhaps in the future when cash flows continue to be positive as well as debt continues to shrink, Marriott Corporation can look into returning shareholders capital.