MARRIOTT CORPORATION: THE COST OF CAPITAL·A CASE ANALYSIS
The findings of this case analysis are presented as answers to seven major questions. Each question is addressed separately.
Marriott Corporation's growth objective was to remain a "premier growth company" by "aggressively developing appropriate opportunities within a lodging, contract services, and related businesses" (p. 577, Case). An important goals associated with this growth objective was to be the "most profitable company" in the businesses in which the firm participated (p. 577, Case). The four components of the firm's financial strategy were to (1) manage hotel properties as opposed to owning the properties, (2) invest in projects that increase shareholder value, (3) optimize the use debt in the firm's capital structure, and (4) repurchase under capitalized shares.
Each of the components of the firm's financial strategy was consistent with the firm's growth objective. Managing properties, as opposed to owning properties, creates greater value than does property ownership; thus, supporting the objective of maintaining the firm's position as a premier growth company. Investing only in project that increase shareholder value is consistent with the firm's growth objective because this element of the financial strategy enhances the probability of growth in the market value of the firm. Optimizing the use of debt in the firm's capital structure is consistent with the firm's growth objective because this element of the firm's financial strategy supports growth at the optimal level of financial risk. The repurchase of under capitalized shares on the market is consistent with the firm's financial strategy because withdrawing these shares from the market reduces the supply of shares in the firm available for trading and, thus, has a strong potential to cause the market price of the shares outstanding to increase; thereby leading to an increase in the market val...