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CORPORATE FINANCE Marriott Corporation CASE STUDY Azad Yılmaz, VU Master of Finance Nijat Mehdizadeh, VU Master of Finance 2017 September.

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Presentation on theme: "CORPORATE FINANCE Marriott Corporation CASE STUDY Azad Yılmaz, VU Master of Finance Nijat Mehdizadeh, VU Master of Finance 2017 September."— Presentation transcript:

1 CORPORATE FINANCE Marriott Corporation CASE STUDY Azad Yılmaz, VU Master of Finance Nijat Mehdizadeh, VU Master of Finance 2017 September

2 HISTORICAL BACKGROUND
MARRIOTT HISTORICAL BACKGROUND Made by Nijat Mehdizadeh 2017 September

3 Summary Marriott International, Inc. is a leading lodging company based in Bethesda, Maryland, USA. opened in Washington, D.C. in 1927 by J. Willard and Alice S. Marriott. it has more than 3,700 properties in 73 countries and territories. The company operates and franchises hotels under 15 brands. There are approximately 300,000 employees at the company’s headquarters and other offices.

4 John Willard Marriott Alice Marriott
Founders: John Willard Marriott Alice Marriott

5 Marriott International headquarters in Bethesda

6 MARRIOTT J.W.Marriott Jr. Chairman & CEO
William Shaw VP & General Manager Arne Sorneson EVP Chief Financial Officer James Sullivan EVP Lodging Development John Marriott Vice Chairman Joel Eisemann EVP Owner and Fracise Services Bradley Wood SVP Risk Management David Grissen SVP Lodging Operations Edwin Fuller VP;President & Managing Director, Marriott lodging International Simon Cooper President & COO Ritz-Carlton Hotel Company Robert Miller President, Marriott Leisure Amy Mc Pherson EVP sales & Marketing Robin Uler SVP food & Beverage, Spa & Retail Services Robert McCarthy President, North American lodging operations James Fisher Director, Corporate Communications Stephen Joyce SVP Owner & Franchise Services Charlotte Sterling EVP - Communications Michael Jannini EVP Brand Management

7 Vision MARRIOTT Vision
“to be the world’s leading provider of hospitality services Taking care of guest Extensive operational knowledge Development of highly skilled workforce Offering best brand portfolio

8 Marriott's size and position in the market
Operates and franchises more than hotels and resorts, totaling approximately 425,900 rooms and 6,300 vacation ownership villas worldwide. 15 brands Has hotels in 73 countries. It is ranked as the lodging industry’s most admired company and one of the best places to work for by Fortune® magazine.

9 Organizational Structure
General Manager Executive Assistant Manager Human Resource Engg Finance Room Division Manager Sales & Marketing Food & Beverages Credit IT Payable Cost Control Purchase Income Audit Payroll Health Club Front Office House keeping Business Center

10 Marriott’s Brands Luxury Lodging Full Service Select Service
Extended Stay Ownership Resorts

11 Competitors Top Competitors for Marriott National & International
Hyatt Hilton Holiday inn Sheraton Holiday inn Best Western Serena In recent years, Marriott’s brand image has slid a bit and now is trying to rebound. The Islamabad Marriott Hotel has market share of 43%, among the competitors i.e. Holiday Inn, Serena, Pearl Continental (Rawalpindi), and Pearl Continental (Bhourbon).

12 Market Share (International)

13 Three main lines of business.
Lodging Contract services Restaurants VU, fakultetas

14 Financial Strategy Selection of investment project by discounting expected cash flow at hurdle rate for each divisions. Hurdle rate is the minimum rate of return that must be met for a company to undertake a particular project. For example,

15 Elements of Financial Strategy
Manage rather than own hotel assets Invest in projects that increase shareholder value Optimize the use of debt in the capital structure Repurchase undervalued share

16 THEORICAL&PRACTICAL ANALYSIS Made by Azad Yılmaz
2017 September VU Ekonomikos fakultetas

17 MARRIOTT The aim of this part is to illustrate the weighted average cost of capital (WACC) for Marriott Corporation and its three divisions such as restaurant, lodging and contracts as well as interpret the logic behind the calculations. 2017 September VU, fakultetas

18 WACC 2017 September VU Ekonomikos fakultetas

19 WACC Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in a WACC calculation 2017 September VU Ekonomikos fakultetas

20 WACC= (1-t)*rD(D/V)+rE*(E/V) Percentage of total revenues
Calculating the WACC Calculation of WACC Mariott Lodging Contract Restaurant WACC= (1-t)*rD(D/V)+rE*(E/V) t= 0,441 1-t= 0,559 rD= 0,1025 0,1005 0,0830 0,0870 rE= 0,2117 0,1952 0,3050 0,2084 D/V= 0,60 0,74 0,40 0,42 E/V= 0,26 0,58 Percentage of total revenues 100% 0,41 0,46 0,13 WACC= 11,91% 9,23% 20,16% 14,13%

21 Re=COST OF EQUITY ( By CAPM Formula)
VU Ekonomikos fakultetas 2017 September

22 The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. It is an integral part of the weight average cost of capital (WACC) as CAPM calculates the cost of equity. 2017 September VU Ekonomikos fakultetas

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25 Calculation of Re Mariott Lodging Contract Restaurant Re= Rf + β X ( Rf- Rm ) Rf 0,0895 0,0690 β 1,6450 1,4230 2,7860 1,6460 Rf-Rm 0,0743 0,0847 Re 0,2117 0,1952 0,3050 0,2084 Note That: Rf-Rm is called as Risk Premium.As Lodging is long term then we use 7,43%. 8,47% for both restaurant and contracts because they are short term **Note That: For Long-Term we used S&P 500 and Long-Term U.S Bond Returns In Exhibit 5. **Note That: For Short-Term we used S&P 500 and Short-Term U.S Treasury Bill Returns In Exhibit 5. 2017 September VU Ekonomikos fakultetas

26 BETA COEFFICIENT Unlevered beta (Asset Beta) is the beta of a company without the impact of debt. It is also known as the volatility of returns for a company, without taking into account its financial leverage. Conversely, levered beta (or “equity beta”) is a measurement that compares the volatility of returns a company’s stock against those of the broader market. In other words, it’s a measure of risk. 2017 September VU, fakultetas

27 CALCULATING BETA ASSET BETA LEVERED BETA 2017 September
VU Ekonomikos fakultetas

28 CALCULATING BETA MARRIOTT LODGING CONTRACTS RESTAURANTS UNLEVERED BETA
MARRIOTT LODGING CONTRACTS RESTAURANTS UNLEVERED BETA 0,8950 0,5490 2,0300 1,1015 RE-LEVERED BETA 1,6450 1,4230 2,7860 1,6460 2017 September VU, fakultetas

29 Rd=COST OF DEBT 2017 September VU Ekonomikos fakultetas

30 Rd=COST OF DEBT Credit Spread: Default Spread based upon rating
The risk-free rate is customarily the yield on government bonds like U.S. Treasuries. 2017 September VU Ekonomikos fakultetas

31 Rd=COST OF DEBT Atvejo problemos 2017 September
VU Ekonomikos fakultetas

32 Rd=COST OF DEBT Rd Calculation of Rd Mariott Lodging Contract
Restaurant Rd= G.Bond Rate + Spread Goverment Bond Rate 0,0895 0,0690 Spread 0,0130 0,0110 0,0140 0,0180 Rd 0,1025 0,1005 0,0830 0,0870 2017 September VU Ekonomikos fakultetas

33 CONCLUSION Marriott has to choose a risk value for each of the business and then go for combining the Hurdle rates for different business to form a portfolio and decide upon which business to invest in. Based on the WACCs stated for Marriott and its various departments it’s obvious that the values are different If Marriott has used only one hurdle rate then it would be used the 11.91% rate which is for the entire company. 2017 September VU, fakultetas

34 CONCLUSION As the risk in a business changes, the β value would change thus changing the hurdle rate. The future rates that the firm has used to predict the WACC are themselves prone to change with time. That is why WACC needs to be updated regularly to make accurate decisions. 2017 September VU, fakultetas

35 CONCLUSION We represent the cost of capital with risk, so therefore the risk in the lodging department is lower when compared with other departments that have a higher WACC. While Marriott used this rate, other projects would be rejected exact Lodging because of its cost of capital of 9.23% which is lower than Marriott’s WACC as entire. A higher rate effects in a negative Net Present Value as well as a reduced cash flow. 2017 September VU, fakultetas

36 CONCLUSION In summary, the risk that Marriott assumes will increase over time as Marriott continues to invest in high risk projects. 2017 September VU, fakultetas

37 RESOURCES Fundamentals of Corporate Finance, Sixth Edition. Westerfield, Jordan Ross Corporate Finance, Pierre Vernimmen, Second Edition VU, fakultetas

38 THANKS FOR YOUR KIND PATIENCE.
2017 September VU, fakultetas


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