Stock Market and Marriott Corp. Essay

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Joseph Taj
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Fin 423
Marriott Corp. Management of Marriott Corp. ran into a dilemma with the company. They had a considerable amount of excess debt capacity and also, projections of future operations and cash flows pointed towards an increase in this capacity for the upcoming year. Marriott corp. identified two general categories of investments, the first being the promotion of growth by expanding current operations and the second was the return of capital to the shareholders by increasing dividends and buying back outstanding stock. There was four possible alternatives, accelerating the expansion of current business, diversifying through acquisition, increased dividends, and repurchase of common stock. Marriott need to first calculate the amount of funds that would be available if the full debt capacity was used. Then they must figure out whether or not to invest excess funds into current or new ventures, or return them to the stockholders. The most important calculation will be the weighted average cost of capital, or WACC. It should be used in order to calculate the overall cost of capital the corporation must pay and also for the individual divisions (i.e. hotels, food service, restaurant) They must also calculate the cost of equity using the CAPM model, while utilizing the risk free rate and levered beta. Next cost of debt will need to be calculated along with the risk premium rate of debt. In order to figure out the WACC for the separate divisions, you must calculate the debt to equity ratios for each subdivision. This will allow management to analyze and compare the divisions together. Management should then analyze the cash flow projections for each business

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