Are the four components of Marriott’s financial strategy consistent with its growth objectives?
The components include: to handle rather than posses assets of the hotel, to invest in the projects that will amplify the value of the shareholder, to optimize debt use in capital structure and lastly to re-buy, when necessary, the undervalued shares. The objectives of Marriotts is to be the most desired employer and service provider in contract services, restaurants, lodging and to be a most reputable and profitable firm in the field.
When the company re-buys the shares, they make shares less in the market; this will in turn cause a high demand in the shares thereby leading to price increase.
This will consequently in the long run reduce the wealth of the shareholder. Marriott should therefore reexamine their procedures of hiring, acquisition of talents and the corporate culture. Generally, the financial strategy of Marriotts is in line with its growth objectives. However, the act of repurchasing shares when undervalued will be detrimental in the long run. On top of this, the financial strategy that they use does not reflect on its interest of becoming the most preferred employer.
How does Marriott use its estimate of its cost of capital? Does this make sense?
The measure of the opportunity cost for the investments is done using the weighted average cost of capital
This is given as follows
WACC=1-trdDV+rEEv
Where
T=corporate rate of tax, rd=debt cost before tax, rE=equity cost after tax, D=debt market value, E=equity market value, V=firm value (D+E)
They use the WACC for the three divisions of restaurants, lodge and services of contractor separately and then for the entire firm as a whole. The costs are updated annually.
This WACC makes sense since it incorporates many variables with the aim of weighing each of the division against the value of the firm (V) and corporate rate of tax (T)
