Marriott Corporation has long been recognized as one of the world’s most prominent players in the hospitality industry. this post Known for its strong brand reputation, innovative management strategies, and diversified business model, Marriott’s case study is frequently used in finance and strategy courses to demonstrate valuation methods and investment decision-making. The Marriott Corp case primarily focuses on the company’s approach to determining the hurdle rate for investments, assessing divisional performance, and evaluating capital allocation strategies across its business units.
This article provides a detailed solution and analysis of the Marriott Corp case study, emphasizing valuation techniques, weighted average cost of capital (WACC) calculations, and investment considerations.
Marriott’s Business Model and Strategy
Marriott’s business model in the period of the case is characterized by three distinct lines of business:
- Lodging – Hotel operations, franchising, and property management.
- Contract Services – Food services, healthcare catering, and institutional management.
- Restaurants – Stand-alone dining chains.
The company’s strategic priorities were clear:
- Manage rather than own assets to reduce capital intensity and financial risk.
- Use cash flow effectively by repurchasing stock and investing in high-return projects.
- Adopt tailored hurdle rates for different divisions instead of a one-size-fits-all approach.
This strategy reflected Marriott’s commitment to value creation and disciplined financial management.
The Central Question: Cost of Capital
The key issue in the Marriott case revolves around the calculation of the cost of capital. more tips here For a diversified company like Marriott, using a single corporate cost of capital could distort investment decisions. Divisions with higher risk could be over-invested in if the hurdle rate was too low, while lower-risk divisions could be underfunded if the hurdle rate was too high.
Therefore, Marriott’s approach required computing divisional WACC for Lodging, Restaurants, and Contract Services, and then comparing investment opportunities to these benchmarks.
Step 1: Weighted Average Cost of Capital (WACC)
WACC is the blended cost of equity and debt, weighted according to the capital structure.
Formula: WACC=EV×Re+DV×Rd×(1−T)WACC = \frac{E}{V} \times R_e + \frac{D}{V} \times R_d \times (1 – T)WACC=VE×Re+VD×Rd×(1−T)
Where:
- EEE = Market value of equity
- DDD = Market value of debt
- VVV = E+DE + DE+D = Firm value
- ReR_eRe = Cost of equity
- RdR_dRd = Cost of debt
- TTT = Corporate tax rate
Step 2: Cost of Equity (CAPM)
The Capital Asset Pricing Model (CAPM) is applied to compute the cost of equity: Re=Rf+β×(Rm−Rf)R_e = R_f + \beta \times (R_m – R_f)Re=Rf+β×(Rm−Rf)
Where:
- RfR_fRf = Risk-free rate (U.S. Treasury rate)
- Rm−RfR_m – R_fRm−Rf = Market risk premium
- β\betaβ = Beta, a measure of systematic risk
Marriott estimated beta for each division by looking at comparable companies and adjusting for leverage.
Step 3: Cost of Debt
The cost of debt was calculated based on Marriott’s credit rating and borrowing spread over the Treasury rate. Since interest payments are tax-deductible, the after-tax cost of debt was used in the WACC.
Step 4: Divisional Analysis
Lodging Division
- Capital-intensive but stable cash flows.
- Lower business risk due to long-term management contracts.
- Beta lower than overall corporate average.
- WACC relatively low, reflecting stability.
Restaurants Division
- More volatile cash flows, driven by consumer spending trends.
- Higher operating risk.
- Beta higher than corporate average.
- WACC higher, requiring stronger returns to justify investment.
Contract Services Division
- Steady growth due to institutional contracts (schools, hospitals, corporations).
- Moderate risk with long-term agreements.
- WACC between Lodging and Restaurants.
Valuation and Investment Implications
By applying divisional hurdle rates, Marriott ensured that:
- Resources flowed to the right divisions – capital-intensive but steady Lodging projects should not be starved of funds due to inflated hurdle rates.
- High-risk divisions were disciplined – Restaurants needed to generate higher expected returns to compensate for volatility.
- Shareholder value was maximized – capital allocation aligned with risk-return trade-offs.
This framework enabled Marriott to evaluate investment proposals more accurately and avoid mispricing risk.
Numerical Illustration (Simplified Example)
While actual calculations in the case use detailed market data, here is a conceptual breakdown:
- Corporate averages: Risk-free rate 8.95%, market risk premium 7.43%, tax rate 44%.
- Betas: Lodging (0.97), Restaurants (1.36), Contract Services (1.11).
- Cost of Equity:
- Lodging ≈ 16.2%
- Restaurants ≈ 19.0%
- Contract Services ≈ 17.2%
- After-Tax Cost of Debt: ~8.6% (depending on spreads).
- WACC (approximate):
- Lodging ≈ 9.3%
- Restaurants ≈ 12.0%
- Contract Services ≈ 10.5%
These values illustrate how hurdle rates differ significantly across divisions.
Capital Allocation Policy
Marriott’s financial strategy was built on three pillars:
- Debt Policy – Maintaining a target debt ratio to optimize WACC and protect credit ratings.
- Dividend Policy – Using share repurchases rather than high dividends, signaling confidence and offering tax efficiency.
- Investment Policy – Applying risk-adjusted hurdle rates for each business line.
The integration of these policies created a coherent strategy: balancing growth opportunities, investor expectations, and financial stability.
Strengths of Marriott’s Approach
- Precision in decision-making: Using divisional WACC avoids distortions caused by a uniform corporate rate.
- Alignment with market realities: Different divisions operate in distinct industries; recognizing this improves accuracy.
- Flexibility: Tailored hurdle rates allow Marriott to adapt to varying market conditions and competitive dynamics.
Risks and Limitations
- Estimation errors: Beta calculations depend on historical data and comparable firms, which may not fully capture future risk.
- Market volatility: Assumptions about risk premiums and debt spreads can shift rapidly.
- Overemphasis on WACC: Valuation should also consider qualitative factors, such as brand strength, customer loyalty, and competitive positioning.
Broader Investment Analysis
From an investor’s standpoint, Marriott’s strategy demonstrated a disciplined approach to growth. Key considerations include:
- Sustainable Value Creation: By separating ownership of physical assets from operations, Marriott minimized capital intensity while earning steady management fees.
- Risk-Adjusted Returns: Divisional hurdle rates ensured projects were judged fairly relative to their risks.
- Shareholder Orientation: Repurchasing shares and disciplined capital allocation indicated strong shareholder focus.
For institutional and retail investors, Marriott appeared attractive due to its robust management framework, consistent cash flows, and focus on value creation.
Conclusion
The Marriott Corp case highlights the importance of valuation and investment analysis in corporate finance. By adopting divisional hurdle rates and aligning investment decisions with risk profiles, Marriott effectively balanced growth opportunities with financial discipline.
The case teaches several lessons:
- One size does not fit all – diversified companies should use divisional WACC for better capital allocation.
- Strategic integration matters – debt, dividend, and investment policies must reinforce each other.
- Value maximization requires discipline – careful risk assessment ensures sustainable shareholder returns.
Ultimately, Marriott’s approach offers a textbook example of how financial strategy and investment analysis can drive long-term success. top article It demonstrates how valuation techniques, when applied thoughtfully, become powerful tools for guiding corporate strategy and enhancing shareholder value.