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Marriott Corporation: The Cost Of Capital

4504 words - 19 pages

Harvard Business School

Rev. March 18, 1998

Marriott Corporation: The Cost of Capital
In April 1988, Dan Cohrs, vice president of project finance at the Marriott Corporation, was
preparing his annual recommendations for the hurdle rates at each of the firm's three divisions.
Investment projects at Marriott were selected by discounting the appropriate cash flows by the
appropriate hurdle rate for each division.
In 1987, Marriott's sales grew by 24% and its return on equity stood at 22%. Sales and
earnings per share had doubled over the previous four years, and the operating strategy was aimed
at continuing this trend. Marriott's 1987 annual report stated:
We intend to ...view middle of the document...

Criteria for bonus awards depended on specific job responsibilities but often
included the earnings level, the ability of managers to meet budgets, and overall corporate
performance. There was some interest, however, in basing the incentive compensation, in part, on a
comparison of the divisional return on net assets and the market-based divisional hurdle rate. The
compensation plan would then reflect hurdle rates, making managers more sensitive to Marriott's
financial strategy and capital market conditions.

Professor Richard Ruback prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
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Marriott Corporation: The Cost of Capital

Figure A

Typical Hotel Profit and Hurdle Rates


Profit rate (%)







Hurdle rate (%)

Casewriter’s estimates.


Profit rate for a hotel is its net present value divided by its cost.

Company Background
Marriott Corporation began in 1927 with J. Willard Marriott's root beer stand. Over the next
60 years, the business grew into one of the leading lodging and food service companies in the United
States. Marriott's 1987 profits were $223 million on sales of $6.5 billion. See Exhibit 1 for a summary
of Marriott's financial history.
Marriott had three major lines of business: lodging, contract services, and restaurants.
Exhibit 2 summarizes its line-of-business data. Lodging operations included 361 hotels, with more
than 100,000 rooms in total. Hotels ranged from the full-service, high-quality Marriott hotels and
suites to the moderately priced Fairfield Inn. Lodging generated 41% of 1987 sales and 51% of profits.
Contract services provided food and services management to health care and educational
institutions and corporations. It also provided airline catering and airline services through its
Marriott In-Flite Services and Host International operations. Contract services generated 46% of 1987
sales and 33% of profits.
Marriott's restaurants included Bob's Big Boy, Roy Rogers, and Hot Shoppes. Restaurants
provided 13% of 1987 sales and 16% of profits.

Financial Strategy

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