Marriott Corp.

/Cost Abridged
Harvard Business School Case #289-047
Case Software #XLS069

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Table A Market-Value Target-Leverage Ratios and Credit Spreads for Marriott and
Its Divisions

Debt Fraction of Fraction Debt Rate Premium

Percentage in Debt at of 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
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

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.
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

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

Hotels:

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 hurck's Fried Chicken

(Owns and franchises restaurants and gaming businesses.) Collins Foods International
Frisch's Restaurants
COLLINS FOODS INTERNATIONAL 20.3 1.45 10% 0.57 Luby's Cafeterias
(Operates Kentucky Fried Chicken franchise and moderately
priced restaurants.) McDonald's
Wendy's international
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.
Cost of debt

Inputs

Debt Fraction of Fraction of Debt Rate

Percentage Debt at Debt at Premium
in Capital Floating Fixed Above
Governmen
t

Marriott 60% 40% 60% ###

Lodging 74% 50% 50% ###

Contract services 40% 40% 60% ###
Restaurants 42% 25% 75% ###

Calculation
Cost of debt
Marrriot 10.02% Notes: Debt premium. The actual interest rate p

Calculation in class Other way: Interest expense

Cost of debt Long-term debt
Marrriot 10.25% Pre-tax cost of debt

Cost of equity
Risk-free rate 8.95% Risk-free rate8.95%
Risk-premium 7.43% Risk-premiu 7.43%

Debt on assets with old leverage ratio Calculation in class

Tax rate 34%
Debt ratio 41% Debt ratio 41%
Equity ratio 59% Equity ratio 59%
Total debt 2,499 Beta on equit 1.11
Total equity 3,596 Beta on asse 0.65
Beta on equity 1.11
Beta on asset 0.76

Tax rate 34%

Debt ratio 60% Debt ratio 60%
Equity ratio 40% Equity ratio 40%
Total debt 5,394 Beta on equit 1.64
Total equity 3,596 Beta on asse 0.65
Beta on equity 1.51
Beta on asset 0.76

Inputs to CAPM equity Inputs to CAPM equity

Risk-free rate 8.95% Risk-free rate 8.95%

Risk-premium 7.43% Risk-premiu 7.43%
Beta on equity 1.51 Beta on equit 1.64
Expected return on 20.20% Expected retu 21.11%

WACC
Equity ratio 40% Equity ratio 40%
Return on equity 20.20% Return on equ21.11%

Debt ratio 60% Debt ratio 60%

Return on debt 10.02% Return on de 10.25%
Tax rate 34% Tax rate 0%

WACC 12.05% WACC 14.60%

 Table B U.S.
Government Interest
Rates in April 1988

Maturity Rate

30-year 8.95%
10-year 8.72%
1-year 6.90%

The actual interest rate payable on existing debt. Cost of Debt: The sum of the risk free rate plus the debt premium.

90.5 Tax rate 34.00%

2498.8 Pre-tax cost of debt 3.62%
4% After-tax cost of debt 2.39%

You can both say 10 and 30 you just need to use a argument
bt premium.
Cost of debt

Inputs

Debt Fraction of Fraction of Debt Rate

Percentage Debt at Debt at Premium Above
in Capital Floating Fixed Government

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%

Calculation

Cost of debt Notes:

Lodging 10.05%
Other way:
Contract services 10.35%
Restaurants 10.75%

Cost of equity
Risk-free rate 8.95%
Risk-premium 7.43%

Debt on assets with old leverage ratio Calculation in class

Tax rate 34%
Debt ratio 74% Debt ratio 74%
Equity ratio 26% Equity ratio 26%
Total debt 10,234 Beta on equit 1.62
Total equity 3,596 Beta on asse 0.42
Beta on equity 1.22
Beta on asset 0.42

Inputs to CAPM equity Inputs to CAPM equity

Risk-free rate 8.95% Risk-free rate 8.95%

Risk-premium 7.43% Risk-premiu 7.43%
Beta on equity 1.22 Beta on equit 1.62
Expected return on 17.98% Expected retu 21.02%

WACC
Equity ratio 26% Equity ratio 26%
Return on equity 17.98% Return on equ21.02%
Debt ratio 74% Debt ratio 74%
Return on debt 10.05% Return on de 10%
Tax rate 34% Tax rate 34%

WACC 9.58% WACC 10.37%

 Table B U.S.
Government Interest
Rates in April 1988

Maturity Rate

30-year 8.95%
10-year 8.72%
1-year 6.90%

Debt premium. The actual interest rate payable on existing debt. Cost of Debt: The sum of the risk free rate plus the debt prem

Interest expense 90.5 Tax rate 34.00%

Long-term debt 2498.8 Pre-tax cost of debt 3.62%
Pre-tax cost of debt 4% After-tax cost of debt 2.39%

Beta's for companies in the Beta on equitEquity % beta on assets

Hiltons hotels 0.76 0.86 0.65
Holiday cor. 1.35 0.21 0.28
La Quinta Motor inns 0.89 0.31 0.28
Ramada Inns 1.36 0.35 0.48
0.42
he risk free rate plus the debt premium.
Cost of debt

Inputs

Debt Fraction of Fraction of Debt Rate Premium

Percentage Debt at Debt at Above Government
in 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%

Calculation

Cost of debt Notes:

Restaurants 10.52%
Other way:
Contract services 10.35%

Cost of equity
Risk-free rate 8.72%
Risk-premium 7.43%

Debt on assets with old leverage ratio Calculation in class

Tax rate 34%
Debt ratio 42% Debt ratio 42%
Equity ratio 58% Equity ratio 58%
Total debt 2,604 Beta on equit 1.65
Total equity 3,596 Beta on asse 0.96
Beta on equity 1.42
Beta on asset 0.96

Inputs to CAPM equity Inputs to CAPM equity

Risk-free rate 8.72% Risk-free rate 8.72%

Risk-premium 7.43% Risk-premiu 7.43%
Beta on equity 1.42 Beta on equit 1.65
Expected return on 19.25% Expected retu 21.00%

WACC
Equity ratio 58% Equity ratio 58%
Return on equity 19.25% Return on equ21.00%
Debt ratio 42% Debt ratio 42%
Return on debt 10.52% Return on de 11%
Tax rate 34% Tax rate 34%

WACC 14.08% WACC 15.10%

 Table B U.S.
Government Interest
Rates in April 1988

Maturity Rate

30-year 8.95%
10-year 8.72%
1-year 6.90%

Debt premium. The actual interest rate payable on existing debt. Cost of Debt: The sum of the risk free rat

Interest expense 90.5 Tax rate 34.00%

Long-term debt 2498.8 Pre-tax cost of debt 3.62%
Pre-tax cost of debt 4% After-tax cost of debt 2.39%

Beta's for co Beta on equitEquity %

Churck's Fri 1.45 0.96
Collins Foods 1.45 0.90
Frisch's Rest 0.57 0.94
Luby's Cafete 0.76 0.99
McDonald's 0.94 0.77
Wendy's inter 1.32 0.79
The sum of the risk free rate plus the debt premium.

beta on assets
1.39
1.31
0.54
0.75
0.72
1.04
0.96
Cost of debt

Inputs

Debt Fraction of Fraction of

Percentage Debt at Debt at
in Capital Floating Fixed

Marriott 60% 40% 60%

Lodging 74% 50% 50%

Contract services 40% 40% 60%
Restaurants 42% 25% 75%

Calculation

Cost of debt
Contract services 8.30%

Cost of equity
Risk-free rate 6.90%
Risk-premium 7.43%

Debt on assets with old leverage ratio

Tax rate 34%
Debt ratio 40%
Equity ratio 60%
Total debt 2,397
Total equity 3,596
Beta on equity 1.71
Beta on asset 1.19

Inputs to CAPM equity

Risk-free rate 6.90%

Risk-premium 7.43%
Beta on equity 1.71
Expected return on 19.59%

WACC
Equity ratio 60%
Return on equity 19.59%
Debt ratio 40%
Return on debt 8.30%
Tax rate 34%

WACC 13.94%
 Debt Rate Premium Above Table B U.S.
Government Government Interest
Rates in April 1988

1.30% Maturity Rate

1.10% 30-year 8.95%

1.40% 10-year 8.72%
1.80% 1-year 6.90%

Notes: Debt premium. The actual interest rate payable on existing debt. Cost of Debt: The s

Other way: Interest expense 90.5

Long-term debt 2498.8
Pre-tax cost of debt 4%

Divisions Profit % beta on assets

Lodging 0.51 0.42 0.22
Restaruants 0.16 0.96 0.15
Contract services 0.33 1.19 0.39
Marriott cor. 0.76 0.76
able on existing debt. Cost of Debt: The sum of the risk free rate plus the debt premium.

Tax rate 34.00%

Pre-tax cost of debt 3.62%
After-tax cost of debt 2.39%