Marriott Corp.

/Cost Abridged
Harvard Business School Case #289-047
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 Name Adithya M
Roll number 2001121 Section C

Leavered Beta Asset Beta Re-Leavered Beta

Marriot Corporation
1.11 65% 1.63725

Leavered Beta Market Leverage Asset Beta Revenue

0.76 14% 0.6536 0.77
1.35 79% 0.2835 1.66
Lodging
0.89 69% 0.2759 0.17
1.36 65% 0.476 0.75

Leveared Beta Market Leverage Asset Beta Revenue

1.45 4% 1.392 0.39
1.45 10% 1.305 0.57
0.57 6% 0.5358 0.14
Restaurant
0.76 1% 0.7524 0.23
0.94 23% 0.7238 4.89
1.32 21% 1.0428 1.05

Marriot Lodging Restaurant

Asset Beta 65% 0.41127910447761 0.84857166437414
Contract Services
Sales/Revene 6522.2 2673.3 879.9
Beta A 0.16857386004722 0.11447950192923

37%
Asset Beta 0.816860270299
Re-leavered Beta 1.361433783831
Weighted average
0.503272
0.47061
Re-Leavered Beta 1.58184270952928
0.046903
0.357
0.4112791044776

Weighted average
0.54288
0.74385
0.075012
Re-Leavered Beta 1.46305459374852
0.173052
3.539382
1.09494
0.8485716643741

Contract Services

2969
 Name Adithya M
Roll number 2001121 Section C

Marriot Lodging
Equity Cost of Capital Equity Cost of Capital
Rf 8.95% Rf 8.95%
Beta 1.64 Beta 1.58
Rmkt-Rf 7.43% Rmkt-Rf 7.43%
Return on Equity 21.11% Return on Equity 20.70%
Debt Cost of Capital Debt Cost of Capital
Tax rate 42% Tax rate 42%
Rd 10.25% Rd 10.05%
WACC WACC
D/V 60% D/V 74%
E/V 40% E/V 26%
WACC 12.04% WACC 9.72%
 Contract Services Restaurants
Equity Cost of Capital Equity Cost of Capital
Rf 8.72% Rf 8.72%
Beta 1.36 Beta 1.46
Rmkt-Rf 7.43% Rmkt-Rf 7.43%
Return on Equity 18.84% Return on Equity 19.59%
Debt Cost of Capital Debt Cost of Capital
Tax rate 42% Tax rate 42%
Rd 10.12% Rd 10.52%
WACC WACC
D/V 40% D/V 42%
E/V 60% E/V 58%
WACC 13.66% WACC 13.94%
Table A Market-Value Target-Leverage Ratios and Credit Spreads for Marriott and
Its Divisions

Debt Fraction of Fraction of Debt Rate Premium

Percentage in Debt at Debt at Above Government
Capital Floating Fixed

Marriott 60% 40% 60% 1.30%

Lodging 74% 50% 50% 1.10%

Contract services 40% 40% 60% 1.40%
Restaurants 42% 25% 75% 1.80%
Table B U.S. Government Interest Rates in April
1988

Maturity Rate

30-year 8.95%
10-year 8.72%
1-year 6.90%
Exhibit 1 Financial History of Marriott Corporation (dollars in millions, except per share amounts)

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Summary of Operations
Sales 1,174.1 1,426.0 1,633.9 1,905.7 2,458.9 2,950.5 3,524.9 4,241.7 5,266.5 6,522.2
Earnings before interest expense and
income taxes 107.1 133.5 150.3 173.3 205.5 247.9 297.7 371.3 420.5 489.4
Interest expense 23.7 27.8 46.8 52.0 71.8 62.8 61.6 75.6 60.3 90.5
Income before income taxes 83.5 105.6 103.5 121.3 133.7 185.1 236.1 295.7 360.2 398.9
Income taxes 35.4 43.8 40.6 45.2 50.2 76.7 100.8 128.3 168.5 175.9
Income from continuing operationsa 48.1 61.8 62.9 76.1 83.5 108.4 135.3 167.4 191.7 223
Net income 54.3 71.0 72.0 86.1 94.3 115.2 139.8 167.4 191.7 223 865.4
Funds provided from cont. operationsb 101.2 117.5 125.8 160.8 203.6 272.7 322.5 372.3 430.3 472.8
Tax rate 42% 41% 39% 37% 38% 41% 43% 43% 47% 44% 42%

Capitalization and Returns

Total assets 1,000.3 1,080.4 1,214.3 1,454.9 2,062.6 2,501.4 2,904.7 3,663.8 4,579.3 5,370.5
Total capitalc 826.9 891.9 977.7 1,167.5 1,634.5 2.007.5 2,330.7 2,861.4 3,561.8 4,247.8
Long-term debt 309.9 365.3 536.6 607.7 889.3 1,071.60 1,115.3 1,192.3 1,662.8 2,498.8
Percent to total capita 37.5% 41.0% 54.9% 52.1% 54.4% 53.4% 47.9% 41.7% 46.7% 58.8%
Shareholders’ equity 418.7 413.5 311.5 421.7 516 628.2 675.6 848.5 991.0 810.8

Per Share and Other Data

Earnings per share:
Continuing operationsa 0.25 0.34 0.45 0.57 0.61 0.78 1.00 1.24 1.40 1.67
Net income 0.29 0.39 0.52 0.64 0.69 0.83 1.04 1.24 1.40 1.67
Cash dividends 0.026 0.034 0.042 0.051 0.063 0.076 0.093 0.113 0.136 0.17
Shareholders’ equity 2.28 2.58 2.49 3.22 3.89 4.67 5.25 6.48 7.59 6.82
Market price at year end 2.43 3.48 6.35 7.18 11.70 14.25 14.7 21.58 29.75 30.00
Shares outstanding (in millions) 183.6 160.5 125.3 130.8 132.8 134.4 128.8 131.0 130.6 118.8
Return on avg. shareholders’ equity 13.9% 17.0% 23.8% 23.4% 20.0% 20.0% 22.1% 22.1% 20.6% 22.2%

Source: Company reports.

a
The company’s theme-park operations were discontinued in 1984.
b
Funds provided from continuing operations consist of income from continuing operations plus depreciation, deferred income taxes, and other items not currently affecting working capital.
c
Total capital represents total assets less current liabilities.
 44%

2023.6
0.427654
Exhibit 2 Financial Summary of Marriott by Business Segment, 1982-1987 (dollars in millions)

1982 1983 1984 1985 1986 1987

Lodging:

Sales $1,091.7 $1,320.5 $1,640.8 $1,898.4 $2,233.1 $2,673.3

Operating profit 132.6 139.7 161.2 185.8 215.7 263.9
Identifiable assets 909.7 1,264.6 1,786.3 2,108.9 2,236.7 2,777.4
Depreciation 22.7 27.4 31.3 32.4 37.1 43.9
Capital expenditures 371.5 377.2 366.4 808.3 966.6 1,241.90

Contract Services:

Sales 819.8 950.6 1,111.3 1,586.3 2,236.1 2,969.0

Operating profit 51.0 71.1 86.8 118.6 154.9 170.6
Identifiable assets 373.3 391.6 403.9 624.4 1,070.2 1,237.7
Depreciation 22.9 26.1 28.9 40.2 61.1 75.3
Capital expenditures 127.7 43.8 55.6 125.9 448.7 112.7

Restaurants:

Sales 547.4 679.4 707.0 757.0 797.3 879.9

Operating profit 48.5 63.8 79.7 78.2 79.1 82.4
Identifiable assets 452.2 483.0 496.7 582.6 562.3 567.6
Depreciation 25.1 31.8 35.5 34.8 38.1 42.1
Capital expenditures 199.6 65.0 72.3 128.4 64.0 79.6

Source: Company reports.

Exhibit 3 Information on Comparable Hotel and Restaurant Companies

Arithmetica 1987
Average Equityb Marketc Revenues
Return Beta Leverage ($ billions)

MARRIOTT CORPORATION 22.4% 1.11 41% 6.52 2.67

(Owns, operates, and manages hotels, restaurants, and
airline and institutional food services.)

Hotels:
Asset Beta
HILTON HOTELS CORPORATION 13.3 0.76 14% 0.77 0.6536
(Owns, manages, and licenses hotels. Operates casinos.)

HOLIDAY CORPORATION 28.8 1.35 79% 1.66 0.2835

(Owns, manages, and licenses hotels and restaurants.
Operates casinos.)

LA QUINTA MOTOR INNS -6.4 0.89 69% 0.17 0.2759

(Owns, operates, and licenses motor inns.)

RAMADA INNS, INC. 11.7 1.36 65% 0.75 0.476

(Owns and operates hotels and restaurants.)

Restaurants:

CHURCH’S FRIED CHICKEN -3.2 1.45 4% 0.39

(Owns and franchises restaurants and gaming businesses.)

COLLINS FOODS INTERNATIONAL 20.3 1.45 10% 0.57

(Operates Kentucky Fried Chicken franchise and moderately
priced restaurants.)

FRISCH’S RESTAURANTS 56.9 0.57 6% 0.14

(Operates and franchises restaurants.)

LUBY’S CAFETERIAS 15.1 0.76 1% 0.23

(Operates cafeterias.)

McDONALD’S 22.5 0.94 23% 4.89

(Operates, franchises, and services restaurants.)

WENDY’S INTERNATIONAL 4.6 1.32 21% 1.05

(Operates, franchises, and services restaurants.)

Source: Casewriter estimates.

a
Calculated over the five-year period 1983-1987.
b
Estimated using five years of monthly data over the 1983-1987 period.
c
Book value of debt divided by the sum of the book value of debt plus the market value of equity.
Exhibit 4 Annual Holding-Period Returns for Selected
Securities and Market Indexes, 1926-1987

Arithmetic Standard
Years Average Deviation

Short-term Treasury bills:

1926-87 3.54% 0.94%

1926-50 1.01% 0.40%
1951-75 3.67% 0.56%
1976-80 7.80% 0.83%
1981-85 10.32% 0.75%
1986 6.16% 0.19%
1987 5.46% 0.22%

Long-term U.S. government bond

returns:

1926-87 4.58% 7.58%

1926-50 4.14% 4.17%
1951-75 2.39% 6.45%
1976-80 1.95% 11.15%
1980-85 17.85% 14.26%
1986 24.44% 17.30%
1987 -2.69% 10.28%

Long-term, high-grade corporate

bonds returns:

1926-87 5.24% 6.97%

1926-50 4.82% 3.45%
1951-75 3.05% 6.04%
1976-80 2.70% 10.87%
1981-85 18.96% 14.17%
1986 19.85% 8.19%
1987 -0.27% 9.64%

Standard & Poor’s 500 Composite

Stock Index returns:

1926-87 12.01% 20.55%

1926-50 10.90% 27.18%
1951-75 11.87% 13.57%
1976-80 14.81% 14.60%
1981-85 15.49% 13.92%
1986 18.47% 17.94%
1987 5.23% 30.50%
Source: Casewriter estimates based on data from the University of Chicago’s
Center for Research in Security Prices.
Exhibit 5 Spreads between S&P 500 Composite Returns and Bond Rates

Years Arithmetic Standard

Average Deviation

Spread between S&P 500 Composite returns and

short-term U.S. Treasury bill returns:

1926-87 8.47% 20.60%

1926-50 9.89% 27.18%
1951-75 8.20% 13.71%
1976-80 7.01% 14.60%
1981-85 5.17% 14.15%
1986 12.31% 17.92%
1987 -0.23% 30.61%

Spread between S&P 500 Composite returns and

long-term U.S. government bond returns:

1926-87 7.43% 20.78%

1926-50 6.76% 26.94%
1951-75 9.48% 14.35%
1976-80 12.86% 15.58%
1981-85 -2.36% 13.70%
1986 -5.97% 14.76%
1987 7.92% 35.35%

Spread between S&P 500 Composite returns and

long-term, high-grade corporate bonds:

1926-87 6.77% 20.31%

1926-50 6.06% 26.70%
1951-75 8.82% 13.15%
1976-80 12.11% 15.84%
1981-85 -3.47% 13.59%
1986 -1.38% 14.72%
1987 5.50% 34.06%

Source: Casewriter estimates based on data from the University of Chicago’s Center for Research in
Security Prices.