Individual Case Questions: “Marriott Corporation: The Cost of Capital (Abridged)”
Due by Thursday, January 30
All answers except equations must be typed in complete sentences.
You are responsible for handing in written answers to the following questions drawn from the Marriott case. You can work with others on this assignment, but each individual must hand in their own set of answers. In your answers, you may want to take into account the fact that the corporate tax rate in 1988 was 34%. (Product number for the case: 289047-PDF-ENG)
1. What is Marriott’s target debt-to-value ratio (i.e. what is their target Debt/(Debt+Equity))?
Marriott technically didn’t have a target debt-to-value ratio. Instead, they used an interest coverage target that stood in its place, which analyzed Marriott’s ability to service its debt.
2. As of the 1987, what was Marriott’s actual debt-to-value ratio?
In 1987, Marriott had about $2.5 billion in debt, 59% of its total capital. This inevitably raised its leverage, allowing the company to take risks and outperform the market and its competitors.
3. What does Marriott estimate their equity beta to be? Using this estimate and other details reported in the case, what do you predict the equity beta of Marriott would be if they had no debt in their capital structure?
Marriott estimates its equity beta to be 1.11. Based on this information, if Marriott had no debt in their capital structure, I believe their equity beta would be lower, more in line with the S&P 500, because adding debt to a firm increases leverage in their operations. If a firm has more leverage, they have more room to take risks and this reflects a higher beta, which in turn leads to greater returns. This series of events is one of the main factors as to what lead to the immense growth of Marriott throughout the 1980’s.
Note: I am not asking a comprehensive answer for these questions. You are encouraged to read this case and provide...