Marriott Corp: the Cost of Capital

To : President, Marriott Corporation From : FLO299 Subject : Marriott Corporation – The Cost of Capital Date : April 6, 2010 The Importance of the Cost of Capital The cost of capital is important as it forms the basis for Marriott’s investing and financial decisions. By understanding and knowing the cost of capital, Marriott is able to select relevant investment projects for the company, determine incentive compensation, and repurchase undervalued shares when needed. The returns of a project were found by discounting the appropriate cash flows against the appropriate hurdle rates. Without knowing the cost of capital, Marriott would not be able to determine hurdle rates that would help Marriott’s growth. Also, knowing the cost of debt would allow Marriott to optimize the use of debt in the company’s capital structure. Knowing the hurdle rates on a divisional level would also enable Marriott to reward their managers using incentive compensation. By using hurdle rates, Marriott managers would be â€Å"more sensitive to Marriott’s financial strategy and capital market conditions† and would give the company a more accountable method of rewarding their employees. Lastly, Marriott’s method of calculating a â€Å"warranted equity value† for its common shares required knowing the company’s equity cost of capital. A share price that was below the â€Å"warranted equity value† signaled to Marriott when the company needed to step in to repurchase its stock as the company believed that repurchases of shares were a better use of Marriott’s cash flow and debt capacity than acquisitions or owning real estate. Computing Marriott’s WACC The cost-of-capital was computed both divisionally and overall for the company. It required using the formula WACC = (1-t_)RD(D/V) + RE(E/V). D and E are the market values of the debt and equity respectively and V (market value) = D+E. RD and RE are the pretax cost of debt and cost of equity respectively and t is the corporate tax rate. The Numbers Used in Marriott’s WACC A 34% tax rate rate will be assumed for simplicity's sake so more effort can be focused on other issues . The above WACC calculation uses market value of debt. Cost of debt can be observed directly by calculating the yield to maturity of outstanding bonds, but since the bond market is not very transparent and we know Marriott's unsecured debt is A-rated, the company can expect to pay a spread above some base rate. Which index to use should be determined by project life, and as lodging is based on a long term business model, a 30-year treasury bond is appropriate. In this case, the base is 8. 95% according to Tabe B and the spread for the overall company is 130 basis points according to Table A. Also found in Table A, Marriott set a target of the debt percentage in its capital structure to be 60% for the overall company. Because there is no way of directly observing the return that equity investors require, we rely on a couple of methods to estimate it. A dividend growth model can be used, and although simply to use, this approach assumes steady dividend growth. This approach also does not directly adjust for the riskiness of a project. An alternative approach is to use CAPM, which does not rely on dividend growth and does take both the market risk premium and systematic risk into consideration. Using CAPM to estimate the cost of equity we use the following formula: _E(R)=Rf+ {draw:frame} *MRP_. Rf is the same risk-free base rate used to calculate cost of debt, in this case, 8. 95% from Table A. The {draw:frame} is obtained from regression using market data and therefore is affected by leverage. To adjust for this, the B is unlevered and then relevered so that it is the B for business risk only, independent of capital structure. With due consideration given to each input, Appendix A is a computation of Marriott's WACC, 11. 87%, which is also the required rate of return for the company overall. The Use of Marriott’s WACC in Divisional Decisions Marriott can use the computed WACC to support its stock repurchasing decisions because it allows the equity cash flows to be discounted at a company level rate. But because each cost of capital input could differ amongst its divisions, the cost of capital varies across each. If Marriott used the above calculated WACC for all divisional decisions, it would cause the company to take on riskier projects, projects that once risk adjusted would likely cause the company to lose money in the long run. A better approach would be to use individual {draw:frame} for each project with CAPM to calculate the WACC for each project and compare it to IRR. Determining Divisional WACC To estimate the WACC for each division, we need their corresponding {draw:frame} . To do this we use comparable companies for each division; this is because we cannot run regressions at the divisional level as that information is not available. For the lodging division, we compare other hotel companies, for the restaurant division, we compare other restaurants, and for the contract services division we use the identity: {draw:frame} M=WL* {draw:frame} L+WR {draw:frame} R+WCS {draw:frame} CS. The identifiable assets in Exhibit 2 will be used to compute the weights of each division. Once again, because the information is actual market numbers, {draw:frame} E is affected by leverage and must be unlevered by multiplying it by 1 – market leverage. This results in {draw:frame} A which is business risk, independent of capital structure. Asset risk is the only thing that is comparable across firms. Within each divisional comparison to comparable companies, weighted average of {draw:frame} A is used as smaller companies have less impact on the overall segment. These numbers are shown in Exhibit 3. The WACC for each division is found in Appendix B to D. Differences in WACC Appendix A: Marriott’s Overall WACC Calculation Appendix B: Marriott’s WACC for Lodging Appendix C: Marriott’s WACC for Restaurants Appendix D: Marriott’s WACC for Contract Services Identifiable lodging assets = 2777. 4 WL = 60. 61% {draw:frame} L = . 57 Identifiable restaurant assets = 567. 6 WR = 12. 39% {draw:frame} R = . 75 Identifiable contract services assets = 1237. 7 WCS= 27. 00% {draw:frame} CS = solve for this below {draw:frame} M=WL* {draw:frame} L+WR {draw:frame} R+WCS {draw:frame} CS 0. 57 = . 6061*0. 42 + . 12390. 75 + . 2700 {draw:frame} CS {draw:frame} CS = 0. 57

The Bioethics Debate

Kristi Ellis Mrs. Scheidt English 1301. 174 11 October 2012 Paper #2 – The Bioethics Debate In â€Å"Patenting Life,† by Michael Crichton, and â€Å"Bioethics and the Stem Cell Research Debate,† by Robyn S. Shapiro, they discuss gene patenting, medicine, stem cell research, and the laws of bioethics. According to Crichton and Shapiro, humans are all born with genes, stem cells, and organs that are part of our natural world, yet when the law tries to put limits on these rights it becomes unethical. Crichton and Shapiro both agree about the controversial issues surrounding science and medicine.They both point out the unethical issues, the innovation in medicine, and the impact on science and medicine in relation to the law. In both essays Crichton and Shapiro list many immoralities that arise out of bioethical issues. For instance, Crichton refers to an example of the Canavan disease in which the process to find a cure was halted due to gene patenting. It was a pri me example of an issue that was unethical because the owner of the gene for the disease could choose whether or not to charge for a test and choose how much to charge for it, which blocks medical innovations.Crichton states, â€Å"There is no clearer indication that gene patents block innovation, inhibit research and put us all at risk† (432). Crichton goes on to say that genes are part of humans naturally and should not be privately owned (431). In comparison, Shapiro explains although embryonic stem cells give promise to the medical field, many ethical issues surround it such as the destruction of the embryo. Shapiro also writes that those who denounce embryonic stem cell research believe the embryo is already a human being with rights from conception, while others believe that human rights do not exist prior to birth (435).Additionally, medical advancement is critical for innovation in both essays. Crichton states that gene patenting prevents medical testing and slows medi cal advancement. Not only does it halt research, but it causes the costs of medical testing to rise because the owner can charge whatever he wants (431). He mentions doctors cannot get information on if a medication will or will not work on someone because the lack of quality tests. Crichton says â€Å"For years we’ve been promised the coming era of personalized medicine – medicine suited to our particular body makeup.Gene patents destroy that dream† (432). In contrast, Shapiro states that stem cells are important to the medical field because they can turn into a wide array of cell types that can help people with diseases such as diabetes, nervous system diseases, and Parkinson’s disease (434-35). In addition, he says stem cell research could provide important information on how human organs and tissues develop, which could lead to development of new medications (435). In both sources, the law plays a significant role in the unethical issues surrounding s cience and medicine.Crichton mentions how the United States Patent Office issued gene patents by mistake because of misinterpreted Supreme Court rulings. The issue of gene patents make it hard for people to donate their genes because most of the genes are privately owned (431). Crichton states that two congressman sponsored the genomic research and Accessibility Act, a bill that would ban patenting genes in nature (432). Shapiro denotes the growing importance of the law surrounding bioethical issues. He cites the United States Supreme Court cases of Roe v.Wade and Stenberg v. Carkart which dealt with a partial birth abortion law. Shapiro states, â€Å"In state courts, bioethical considerations inform judges’ balancing of patient healthcare confidentiality with a â€Å"duty to warn† of potentially dangerous patient behavior (433). The most significant law Shapiro cites is the Dickey Amendment which prohibits federal funding for embryo research (436). Shapiro mentions i n addition to federal funding restrictions, many states have laws that limit embryonic stem cell research.Lastly, he cites the eligibility of federal patent protections significantly, the Thomson Patents (437). In conclusion, both Crichton and Shapiro can conclude the topics of gene patenting and embryonic stem cell research are unethical in some way. Although gene patenting blocks innovation and embryonic stem cell research promotes it, they both have laws that limit the impact on the world of science and medicine. According to Shapiro, â€Å"As these issues have moved to the center of public debate, the law has assumed an increasingly important place in the discipline of bioethics† (433).Thus, when the law puts limits on human genetics it becomes unethical and immoral according to both essays in this bioethical debate. WORD COUNT: 740 Works Cited Crichton, Michael. â€Å"Patenting Life. † Perspectives on Contemporary Issues: Readings Across the Disciplines. 6th ed. E d. Katherine Anne Ackley. Boston: Wadsworth/Cengage Learning, 2012. 431-432. Print. Shapiro, S. Robyn. â€Å"Bioethics and the Stem Cell Research Debate. † Perspectives on Contemporary Issues: Readings Across the Disciplines. 6th ed. Ed. Katherine Anne Ackley. Boston: Wadsworth/Cengage Learning, 2012. 433-438. Print.

Community Service Argument Essay

Community Service Argument Green Bay High Schools are being faced with a very controversial issue, which revolves around whether or not community service hours are needed to graduate. High schools are arguing that 24 hours of community service are needed to graduate from their facility of learning, but many frustrated students are voicing protests to this demand. This situation has caused much controversy among the school system and many arguments have risen in support and against this community service issue. Supporters of the community service project argue that if students fulfill their 24 hours of community service in high school they will develop into upstanding pillars of the community. They believe that students will become better aware of what the real world is like by doing community service and giving back to their community. Students will learn valuable life lessons by participating in community service and will feel good about themselves for helping others in need. Protestors have struck back with a very solid argument. They feel that if high school students are forced to do community service they will begin to see it as a punishment and as something that they have to do because it is required instead of something that they want to do because it is the right thing to do. Students will in the future look back at the community service projects that they were forced to do throughout high school and will continue to carry a negative outlook on community service for the entirety of their lifetime. Another idea that the protestors give about this community service issue is time constraints will make it close to impossible for high school students to fill the necessary 24 hours needed to graduate. High school students have an enormous amount of things going on in their lives. They attend school daily for 7 hours, participate in extra-curricular activities, and have part-time jobs. High school students have such a limited amount of time for themselves, as it is that by tacking on another time-consuming project like community service is ridiculous. Supporters argue back that high school students only need to fulfill 24 hours of community service throughout 4 years, that really isn’t asking a whole lot of time commitment. If students budget their time and start the community service when they are a freshman all they need to do is an hour every other week and they will still be done  with a year or so to spare. A final controversial issue that pops up is transportation. The protestors argue that freshman and sophomores in high school do not have their driver’s license, so how are they expected to get to their community service site when their parents or friends are at work or just to busy to give them a ride. Unless the school offers a means of transportation for the students there really is no solution to this problem. The supporters argue that students can find community service projects close to home or if they live in the country find another student to car pool with. Forcing students to complete 24 hours of community service in high school in order to graduate is a very controversial issue. Both sides have solid arguments about why community service should or should not be forced upon students. Community service is a wonderful thing that everyone should be required to do at some point in their life, but are high school students mature and responsible enough to take on community service projects at this stage in their life?

Good And Bad Manners Essay

Good Manners have a deep Affect on our minds. As bad manners produce bad results in society, good manners produce good results. Good manners are unconsciously acquired in our childhood, but they can also be cultivated later on. Every human being should be treated with due respect and dignity. The animal instinct in us makes us rough and vulgar, but a cultured and civilized man is gentle and polite. By good manners we understand the way in which a person should behave in society. One is expected to show respect one’s elders. Good manners are necessary for everyone, in every walk of life. It is good manners to thank anybooy who does anything for you. When a waiter brings you a glass of water, you may thank him. â€Å"Friends and good manners will carry you where money won’t go.† Good manners are vital for success in life. Nobody likes a rude person, but good manners endear a man to other. A shopkeeper who behaves rudely with his customers can never flourish in his trade, but one who behaves politely and pleasantly with others attracts a large number of customers. Patients always rush to a doctor who is sympathetic towards them. A leader cannot have a large follower unless he is polite to others. In fact good manners have a magnetic influence over the people. Good manner are not, however, born with us. They have to be cultivated with great care. Childhood is the best period to cultivate good manners and so both parents and teachers have a great role to play. Bad Manners: The Height of Bad Manners is Way too Much To begin with, Bad Manners is defined by lack of polite or well-bred social behavior resulting by ignorance, this may be true, but I don ´t think so, this is because nowadays people are adopting this reprehensive conducts no just by ignorance, but for doing whatever they want, in this bad manner conducts we can see: not respecting adults, farting in front of anybody, not saluting, people that don ´t respect the third age privileges in public places/transport. In the world we can see many of this awful behavior but each day we can see it more in our community its becoming part of our daily life to be disrespectful with others and don ´t minding about if the other  person would feel bad about it. As your parents probably told you not so many years ago this â€Å"Bad Manners Acts† where severally punished with very strict sanction but now we can see a teenager threatening and old man so they give him the spot in the bus.

Comparing the differences of purpose of government according to Term Paper

Comparing the differences of purpose of government according to Philosophers. (Plato, Aristotle, Hobbes, and Locke) - Term Paper Example Some of the difficulties that society in the classical period faced are the same as what society experience today. For example, the question on whether to have a democratic, aristocratic, tyrannical or oligarchy was handled by in the classical period by Aristotle yet the same question still presents when discussing modern forms of governments. Thus, it is true to say that philosophers of classical period and modern philosophers are still faced with the same question on what is the purpose of the government and how does the government exercise its powers. According to Plato’s idea of an ideal state, the structures and functions in society should be explored in relation to the structure of individual soul. According to him, the individual soul is the different parts of the body in which the workers were the productive part that is represented by the abdomen, the solders that are the protective part represented by the chest and philosopher kings are the governing part that is rep resented by the head. From this classification, Plato envisioned the government, solders and workers each performing a different function in the state. The state as represented by the head can be seen to control and direct the functioning of other parts of the state as the whole body. This means that the government which is represented by the head, has the role of coordinating the activities all other parts of the society (Chang 71). Plato’s stand as expressed in the Laws presents and authoritarian view of government and authority. He claims that for a society to prosper, the authority must impose the right conditions on the people. Further, for maintenance of this prosperity, the authority should be iron fisted in dealing with the people (Crombie 178). My view is that this form of government does not allow the people to exercise their rights freely since all the power rests on the rulers and the people cannot question the decisions made by such a government. A government tha t functions under such ideals might become tyrannical thus denying the people their rights to exercise their opinion freely. Plato and Aristotle differed in their views of the functioning of the government where Plato’s idea of government was a centralized system with power resting in the hands of a few individual who belong to a political class and they exercised sovereignty over laws governing the land. His idea of the soul and the body where governing is a function of the head means that the government is a reserve of a few who are able to climb to the highest pinnacle of society. I find Aristotle’s government functioning as a more suitable one since it allows for the governing of the people through a constitution. This is a favorable system given that the sovereign power lies with the people and the government exercises such powers according to the demands of the society. Aristotle sees the functioning of the government as determined by the aspirations of people th at is enshrined in the constitution. According to him, the functioning and purpose for which the society sets up a government is enshrined in the will of the people and is further expressed through the constitution. The government function is based on the different forms that they take. Aristotle claims that the role of government will vary depending on whether it is a tyranny, aristocracy, an oligarchy or a democratic government (Simpson 215). Aristotle stated in his definition that a constitution is an organization of offices particularly one that has sovereignty over all the others in the society. In this definition, Aristotle recognized offices as the constitution and not a written law. A government will function differently, he argues, when

Globalization Essay Example | Topics and Well Written Essays - 500 words - 19

Globalization - Essay Example This has an impact on the capitalist social and economic relations through microeconomic and multilateralism phenomena like competitiveness of businesses globally. The consequential change of production systems has an impact on the labor process, class structure, technological application, and capital organization and structure. Globalization marginalizes workers that are less educated and less skilled. As a result of globalization, expansion of business does not automatically result in increased employment. The higher mobility in comparison to labor can cause high capital remuneration. Power in the global economy is a company’s ability to command the tangible as well as intangible assets that result in increased loyalty of the customers irrespective of location. A company can tap into global networks no matter what is its geographic location or size. Globalization has had mixed effects on world economy with the increase in trade and foreign direct investment on one hand, and increased labor and production costs and income inequality on the other hand. Globalization has mixed effects on currency as a result of which, certain countries become stronger economically while other countries loose economic strength. Acceleration of globalization has caused market conditions to change. This has affected the volatility and value of national currencies all over the world. For example, the euro EUR in the European Union has replaced a number of local currencies. The Renminbi RMB has challenged the power of the US dollar. Many other currencies are linked with euro and dollar to deter harmful volatilities and fluctuations. Countries like Germany and China have taken advantage of the power of global currencies’ unification to sustain their growth. On the other hand, countries like Spain and Greece have gathered huge national debt while other countries have become poorer. A range of factors

American Dream Essay Example | Topics and Well Written Essays - 1000 words

American Dream - Essay Example Although there had been growing aspirations, which are considered the basis of American dream, the term American dream was first used in 1931 by James Truslow. Although many American still contemplate of the American dream, the dream is different for everyone. The dreams of the Americans are very divergent and some are not even associated with the initial American dream. The American dream was meant to provide success, happiness, and freedom for all. The above would result from availability of equal opportunities for all Americans to achieve their goals based on their ability but not diversity. However, some have not achieved any of this. Initially, most Americans interpreted the American dream as the ability to possess excessive wealth in terms of motorcar and extraordinary wages. In 1963, Martin Luther King Jnr, gave his opinion regarding the American dream. In his dream, Luther envisioned an America that was free from any form of discrimination. In Luther’s opinion, achievement of American dream would come about when the descendants of slaves would be able to live together with the posterities of the slave masters. In Luther’s opinion, American dream was a concept in which justice will reign over racism and oppression. Equal opportunity meant a justice system where people will be judged by their character and not their skin color or nationality. In this concept, the American dream is far from being achieved. Years after the launching of the American groups, several individuals are still struggling as they attempt to convince the American authorities that they are Americans. Although some aspects of the American dream have been achieved, much of the dream is long dead. In other worlds, some aspects of the dream are still a dream that has not been achieved. The American dream is only alive in the minds of people. For people like Sami Al-Arian, who suffer because of their ethnic identity, the American dream is dead. The American dream was supposed to bring justice to all. However, people Like Sami Al-Arian, face charges for crimes they did not commit because of their religious beliefs and country of origin. The American dream envisioned an America where all people were free to enjoy their freedom irrespective of their nationalities. However, people from certain regions of the world or certain religious beliefs are treated with impartiality. They have to keep attesting that they are not terrorists (Al-Arian, 2012) The dream of an America with racial equality is no longer living. Impartiality towards minority groups remains high. The opportunities to share i n the American