Marriott Corporation Essay

While management was correct in around aspects of standard debt potentiality for Marriott kitty, the method used to obtain the ratio of 6.64 did non include the debt from the previous buyback, grossly overstating the ratio and leading to believe that Marriott Corporation had a large unsused portion of debt capacity. This is shown in Exhibit 5. After complete(a) analysis and a different approach to finding the debt capacity, it is concluded that the existent debt capacity for Marriott Corporation is 3.94 EBIT- modify/ clear up concern. To come up with the actual debt capacity for Marriott Corporation, the EBIT-adjusted/net interest ratio was still used, exactly the verse sustenance the ratio were altered. From Exhibit 5, we get the total debt of Marriott at the end of 1979. impart debt is defined as the sum of short-term loan, current portion of semipermanent debt, senior debt and capital leases. The average market place impairment of Marriott in 1979 was $14.9/ portion, and the interest govern for Baa corporate debt was 12%. It was filmd that Marriott repurchased stock at the price of $15/shargon using 12% debt financing. Using the net interest in advance the repurchase, which was $27.8 one million million million, it is concluded that adjusted EBIT was $184.59 million. In 1979, redundant debt from the repurchase of stock $159 million, adding this to the debt of the original figures, the new debt is totaled at $583.83 million. Using a 12% interest rate from the new debt and finding the new numbers for the ratio, the new adjusted EBIT-adjusted/net interest ratio is 3.94. This figure gives below Marriott Corporations bench mark of 5. Returning Shareholders CapitolA. New Debt Capacity And Repurchasing SharesIf the firms stock is in a position to be affected by dilution, repurchasing shares may be a solution. This would allow Marriott Corporation to maintainits ability to make decisions utilizing all the accessible resources. This was previou sly one by Marriott in 1979 with the repurchase of 5 million shares. With the new debt capacity ratio at 3.94, a repurchase share alternative is not recommended as Marriott Corporation does not have the extravagance debt capacity previously thought to carry out this alternative. Performing a secondary scenario analysis, suppose Marriott had just abounding debt capacity, which means 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, move on 10.6 million shares could be purchased resulting in the repurchase of stock alternative not victorious place as expected. This would result in sit downors to believe that Marriott Corporation has hit its offset limit, as the repurchase strategy would not have enough depth to persuade investors finished with(predicate) EPS and ROE that Marriott Corporation is still a growing company. It is concluded that repurchasing shares is not the correct alternative, even with a benchmark debt capacity of 5.B. Increasing DividendsWhile increasing dividends would be a untroubled alternative to satisfy investors, it is not without its repercussions as well. If dividends were to be paid out, a gradual steady increase over many years would be the best alternative, as one lump sum payment does not resolve the debt capacity issue, as well as signify to investors detrimental signs if Marriot Corporation were to one year pay a high shared and the next decrease that same dividend.Typically, when a firm increases dividends, that level of dividends moldiness be maintained to satisfy shareholders, as well as institutional investors and prospect investors. An some other 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 blondness, as well as earnings per share are low, as seen in Exhibit 11 and Exhibit 12. Although paying dividends in conjunction with a more measure creating alternative could be used, solely paying out dividends is not recommended. tug GrowthA. Diversify Through AcquisitionMarriott also has the alternative to invest in a new firm. MarriottCorporation has a competitive advantage that could be passed along if they were to acquire existing companies. This competitive advantage is obtained through their competitive expertise of the industry, as well as proven higher(prenominal) business rate than their competition. The companys assets are mainly real-estate base which means that they should put a premium on the land that they stinkpot get by acquiring a new firm. There is comparatively little risk in acquiring another firm as well, because their sales flowerpot be seen and dismemberd before Marriott Corporation makes an offer. fit to Exhibit 10 there is a very high price to be paid for a new hotel. Prices paid for hotels, however, di d not jump-start at all from 1975-1978 and number of offers stayed relatively reasonable.From 1977-1978 acquiring another hotel bowed stringed instrument actually became a better deal at several entropy points. Market price/book time value dropped considerably meaning that hotels became a much better value for the amount of assets they had. Market price/cash flow is lower as well, with average return on equity rising as well. One caveat is that buying hotel arrange in the market value of $25-$250 million had a much higher untoughened offer/ market value in 1978 up from 39.64% to 60.05%, while hotel chains over 250 million dropped by almost 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 labor 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 tw o options about the surgical process of hotel chains. First, it can own the hotel and enjoy the profit margin. Second, it can stag the hotel just now retain management contracts so it controls the operation of such units. Following is the flesh out decomposition of costs associated with two options. According to Exhibit 9, in 1978 the emblematic cost for a hotel room consists of improvement cost, furniture, fixtures and equipment cost, land cost, pre-opening cost and in operation(p) 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 buyer was responsible for the maintenance. In an attempt to emphasize more on return on invested capital rather than margins, Marriot exchange 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 owne d hotels. To decide when to sell the property, we analyze the remaining present value of future cash flow of 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 enhancement per room night of a typical 150-room hotel, and one year has 360 days. gross 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 max 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 s ells 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 quality 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 way out from selling the property.RecommendationAfter 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 offers 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 out scent for Marriott Corporation.Also, with the act ual 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.