Marriott Corp Essay

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Case Study 1 Marriott Corporation: The Cost of Capital ES2 – 10 MARCHITAN Stanislav RAI Rohit SANCHEZ Paola DURAK Mustafa WANG Guan Answer 1. The four key elements of Marriott’s financial strategy and an analysis of their effect on growth objectives of doubling sales and EPS are as follows: a. Manage rather than own hotel assets: Marriott’s core competency is management of hotels and restaurants and not real estate development. Managing rather than owning hotel assets would allow it to focus on its core competency and provide more liquidity to Marriott enabling it to invest in profitable ventures. Also, the depreciation and amortization expenses will not have any impact on the net income of Marriot. This could support its growth objectives of increasing the sales and EPS. However, as a result of this strategy, Marriott would have to wait for investors to earn a prespecified return before it could receive its 20% share of the profit. This may limit the profits it can reap from the hotel business. b. Invest in projects that increase shareholder value: Marriott can increase shareholder value by making wise investment decisions and generating healthy returns on invested capital i.e. by investing in projects with positive net present value (NPV). Such projects will increase its sales as well as its cash flows and consequently result in increasing the EPS. 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

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