Case Analysis

by
Group Number: 12
1 EPGP-14D-015 ANSA ELIZABETH GEORGE
2 EPGP-14D-035 JAYASANKAR V
3 EPGP-14D-053 NITIN KATIYAR
4 EPGP-14D-072 RANJIT ANNASAHEB PATIL
5 EPGP-14D-090 SHIVENDRA TRIPATHI
6 EPGP-14D-109 VENKATESH DEO
1.What is the proper way for Marriott management to measure the firm’s debt capacity?

Answer: Marriott's current debt settlement ratio is 6.4, well above the desired minimum of 5 set by
management. As a result, Marriott now has a net excess of debt capacity. The net profit of
$27,840,000 claimed by Marriott in 1989 was multiplied by a debt settlement ratio of 6.4 to obtain
a 1989 EBIT of $184,857,000 representing the company's available debt repayment capacity.
The new net interest is $36,971,000 calculated using the same but opposite method and the
minimum debt payment ratio. By subtracting $27,840,000 of net profit from $36,971,000 of gross
profit, we get a new net profit of $9,131,000. Marriott's BBB-rated corporate bond yield is currently
12.06%. For a minimum debt settlement ratio of 5, Marriott may incur a total debt of $75,716,000
($9,131,000 divided by 12.06% of the bond yield).
The purpose of raising capital is to provide money for development. Earnings before interest, taxes,
depreciation and amortization (EBIT) adjusted for repairs and replacements help us forecast future
cash flows.
It should be noted when a company uses a lot of convertible bonds or low-interest loans, debt
solvency is another metric to gauge a company's ability to pay its short-term debt. Their ability to
pay interest relative to their EBIT(D)A indicates that they are financially sound. However, interest
insurance breaks down when they have to convert low-interest or convertible loans into higher-
interest conventional debt capital. Measured against EBIT, net debt versus EBITDA will be less
biased under these conditions (D) Interest rate protection. However, using leverage to assess a
company's financial structure poses several problems. For starters, a company's short-term cash
flow relative to interest payments can put the company at high risk of financial distress, even if the
company's leverage is minimal. compared to market value. While the debt of high-growth
companies tends to use relatively low leverage, this does not always make it a safe investment.
Second, leverage is a sign of instability because market values can fluctuate significantly
(especially for large, high-growth businesses). Concerns may also arise if there is too little debt. If
the return on investment generated by the company's activities is greater than the interest on the
loans, this debt will contribute to the expansion of the company's profits. If your loan is not
approved, it may be because your rate of return is too low.

2.Has Marriott fully utilized its debt capacity?

Answer: The company has yet to make the most of its borrowing capacity to finance investments
that could yield more money in the years to come.
The company's management does not believe that the debt ratio is a good indicator of a company's
ability to pay its debts. The company must evaluate this case based on a multiple of five times
earnings before interest and taxes (EBIT).
Please note that the Company has not utilized its maximum debt capacity as the Company's
management has determined that doing so would be inconsistent with the Company's stated
objective of increasing shareholder value.
The company has yet to make the most of its borrowing capacity to finance investments that
could yield more money in the years to come.
The company's management does not believe that the debt ratio is a good indicator of a company's
ability to pay its debts. The company must evaluate this case based on a multiple of five times
earnings before interest and taxes (EBIT).

Cost of capital (current)

The weighted average cost of capital calculation using the data provided in this case study is as

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follows:

Cost of capital
Risk free rate 10.40%
Market return 17%
Beta 1
Cost of equity 17.00%
Cost of equity (given) 17.00%
Cost of debt (given) 5%
Debt
Current Debt $155
New debt issue $235
Total Debt $390
Equity
Shareholder’s equity $413,503
Treasury Shares 10
Tender price $23.50
Treasury stock value -$235
Net shareholders equity $413,268
Debt $155,000,000
Equity $56,000,000
Capital $211,000,000
Debt% 73%
Equity% 27%
WACC 8.18%

Based on the data presented in the case, we can determine the weighted average cost of capital.
With a cost of capital of up to 8.18%, the company needs to create a lot of value to reach
breakeven.

Compare the weighted average cost of capital of the existing debt with the weighted average cost of
capital of the proposed new debt to determine that the company has not yet reached its debt
capacity.

Cost of capital (new debt)

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 Cost of capital (Appendix)
Risk free rate 10.40%
Market return 17%
Beta 1
Cost of equity 17.00%
Cost of equity (given) 17.00%
Cost of debt (given) 5%
Debt
Current Debt $155
New debt issue $235
Total Debt $390
Equity
Shareholder’s equity $413,503
Treasury Shares 10
Tender price $23.50
Treasury stock value -$235
Net shareholders equity $413,268
Debt $235,000,000
Equity $56,000,000
Capital $291,000,000
Debt% 81%
Equity% 19%
WACC 7.31%

Based on the data presented in the case, we can determine the weighted average cost of capital. The
company's current cost of capital is 7.31%, representing the return required before the company is
considered worthwhile.

3.If Marriott has unused debt capacity, in which of the following ways should Marriott
management invest the excess funds?

Answer: To maximize the benefits of available credit facilities, companies and their management
need to seriously consider their long-term goals and expansion strategies. The ultimate goal of a
company is to be the most profitable company in its field, so it's important to make this choice
wisely. Since companies have access to large amounts of cash and can easily assume more debt, it
is wise to increase debt to reduce capital expenditures. Current debt has a higher weighted average
cost of capital than new debt. The ultimate goal of this program is to increase the company's equity
value and reduce the company's weighted average cost of debt. Both can only be achieved by
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leveraging the company's available and undeveloped debt capacity. Too much cash can have many
negative effects, so it's important for businesses to plan ahead for their next actions. Too much
money and resources have the following consequences:
• Excess funds and excess cash reduce the return on assets. (ROA)
• Surplus funds and excess cash increase the company's cost of capital.
• Excess funds and excess cash increase overall risk by destroying the company's value.

a. Paying shareholder dividends

Investors who typically prefer dividends to other forms of income should gravitate towards it.
The company's ability to target a larger pool of potential investors allows it to raise capital at more
reasonable rates. An increase in the dividend will lead to an increase in the stock price.
Dividend payments are made from excess cash flow.
Cons
A change in the company's consistent dividend policy would have a material adverse effect on the
stability of its financial ratios but would be difficult to implement.
The inability to keep paying dividends year after year indicates that the company is unstable.

b. Repurchasing its own stock

Debt is cheaper than stock, so you need to make the most of your company's creditworthiness. The
company has agreed to submit a loan application, indicating that it owes about $235 million.

Proceeds from the bond issuance will be used to purchase the offering, reducing its value by an
estimated $235 million. It also increases the company's average maximum bid.

Here are some pros and cons to consider before deciding whether to buy back stock.

Pros
Repurchasing shares to reduce the number of shares outstanding will benefit future earnings per
share. By repurchasing shares, a company can increase its market value.
Shares purchased under a profit-sharing plan or employee stock options may be repurchased by the
company.
Cons
For investors, this could indicate that the company isn't promising enough to warrant a capital
investment.
Signs of undervaluation due to share buybacks.
Without these investments, the company would lose any interest it might have earned on its
additional capital. It would be difficult for us to repurchase our shares at their present value, and the
amounts paid could be prohibitively high compared to the expectations of other investors and
shareholders.

c. Investing in its existing businesses

Alternatively, you can reinvest any excess cash you have on hand in ongoing operations.
Expanding your current business provides several benefits such as introducing new products and
services, increasing profitability, and acquiring new customers.

Here are some pros and cons of putting money into your current venture.

Advantage
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Being able to take advantage of economies of scale is a key advantage when expanding your
business. The company was able to cut costs and lower unit prices by increasing production
volumes.
This will allow the company to acquire more supplies and goods. This will facilitate the expansion
of the company's customer base.
After that, the company may have more influence over the market price.
This helps mitigate some of the risks the company faces from the outside.
As a result, the company's revenue and profit increase.

Disadvantage
To finance the expansion, the company will need to take out a loan. Allocating extra work to
workers can be demoralizing and result in less work.

d. Acquiring another firm A while covering the following topics:

Smart purchases can help your business grow for years to come. Below are some of the pros and
cons of buying another company.

Advantage
It's an effective way to scale the business that helps you quickly close the gaps in your team's skills
and infrastructure.
A synergistic effect can be expected.
Groups can reduce competition from new entrants through acquisitions, which also reduces the risk
of a negative competitive reaction.

Disadvantage
The two cultures are unlikely to mesh well and can cause problems for your company. The
potential benefits of purchasing it can be disappointing.
Companies need excellent skills to adapt to change.
1. Marriott's History and Debt Debt Determinations
2. Marriott's Current Debt Capacity and Unused Debt Capacity
3. Investment in Marriott's Untapped Debt Capacity
4. Evaluation of companies in general and Marriott stock buybacks in particular
5. Plan Marriott operations

1. Why is Marriott management proposing Project Chariot? What is it trying to accomplish?

Answer: The idea of "Project Chariot" To combat the collapse of real estate values, two firms,
Marriott International incorporated and Host Marriott Corporation, were divided into separate legal
organisations. As a result, investors now have the possibility to engage in both the hotel
management and hotel real estate investment sectors.
The separation of MC into two companies will increase the value of the company overall and
eliminate the risk posed by investors selling hotels for a loss. There were no large losses for the
stockholders because they anticipated dividend payouts that were tax-free because the split was
designed with the IRS's special dividends in mind.

2. What is the likely impact of Project Chariot on the wealth positions of the shareholders?

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Answer: By establishing a special stock dividend for current MC shareholders, shareholders will
gain. Shareholders of MC would receive a new dividend that would match each share of stock they
currently own in MC. High leveraged risky investments are being made right now. Shareholders
would profit at the expense of bondholders, increasing the company's stock value.

3. Should management be concerned by the loss in the market value of the bonds if Project
Chariot is implemented?

Answer: Even though each of the corporations received first right of refusal and strong
coordination, HMC would keep the Marriott Corporation's long-term debt, which is close to USD
2.6 billion. The separation of the two businesses would influence the debt holders, despite the
management's confidence in its ability to pay all interest and principal payments on long-term
obligations when due. As a potential immediate response, the rating agencies can reduce their
rating and place their bonds on a level below investments grade and in high risk if markets do not
correct themselves for real estate and asset appreciation does not occur. Since banks, pension funds,
and insurance companies have regulatory constraints limiting the amount of investment in low-
grade securities, this would force some institutional holders to sell their holdings. Although HMC
would be valued based on the potential for property assets to appreciate when the real estate market
rebounded rather than based on earnings, this would lessen the need to sell properties at low prices.
Overall, the project could have been secured because the threat did not outweigh the benefits of
doing so.

4. Is Project Chariot a matter of survival for Marriott as of the fall of 1992? The case allows
you to make an estimate whether Marriott will be able to service its debt, given your
assumptions about future profitability, revenue growth, and property sales. Please see case
exhibit 6 for summary statistics on Marriott’s past performance.

Answer: The fact that HMC would inherit practically the whole existing debt burden associated
with the existing organisation, while MII with the largest cash flow potential, would emerge
essentially debt-free, appears to be the biggest risk associated with project Chariot. The use of
efficient debt collection methods and the reduction of any irrational inventory stocks are examples
of strategies. More than 500 USD million in accounts receivable and more than 200 USD million in
investments are shown on the consolidated balance sheet for the Marriott Corporation.

5. Would you recommend implementation of project Chariot?

Answer: It is advised to move on with Project Chariot given the current situation because doing so
would allow the business to free up the ability to raise further funds or debt.
Additionally, the current real estate downturn is only transitory, and later asset appreciation will
increase the value of the current company (HMC). The new business (MII) will gain from having a
successful bottom line and a strong top line, which will allow them to raise money for further
expansion. Opportunities for advancement will become available to the personnel as a result of the
creation of two firms; in the past, MC has already reduced surplus staff to improve operational
efficiency.

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