Table A

Market Value-Target Leverage Ratios and Credit Spreads for Marriott and Its Divisions
Debt
Percentage in
Capital

Fraction
of Debt
at Floating

Fraction
of Debt
at Fixed

Debt Rate
Premium above
Government

Marriott

60%

40%

60%

1.30%

Lodging
Contract services
Restaurants

74%
40%
42%

50%
40%
25%

50%
60%
75%

1.10%
1.40%
1.80%

Table B
Maturity
30-year
10-year
1-year

U.S. Government Interest Rates, April 1988

Rate
8.95%
8.72%
6.90%

Exhibit 1

Financial History, 1978-1987 (millions of dollars except per share data)

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

Summary of Operations
Sales
Earnings before interest expense and income taxes
Interest expense
Income before income taxes
Income taxes
Income from continuing operationsa
Net income
Funds from continuing operationsb

$1,174.1
107.1
23.7
83.5
35.4
48.1
54.3
101.2

$1,426.0
133.5
27.8
105.6
43.8
61.8
71.0
117.5

$1,633.9
150.3
46.8
103.5
40.6
62.9
72.0
125.8

$1,905.7
173.3
52.0
121.3
45.2
76.1
86.1
160.8

$2,458.9
205.5
71.8
133.7
50.2
83.5
94.3
203.6

$2,950.5
247.9
62.8
185.1
76.7
108.4
115.2
272.7

$3,524.9
297.7
61.6
236.1
100.8
135.3
139.8
322.5

$4,241.7
371.3
75.6
295.7
128.3
167.4
167.4
372.3

$5,266.5
420.5
60.3
360.2
168.5
191.7
191.7
430.3

$6,522.2
489.4
90.5
398.9
175.9
223.0
223.0
472.8

Capitalization and Returns

Total assets
Total capitalc
Long-term debt
Shareholders equity
Long-term debt/total capital

$1,000.3
826.9
309.9
418.7
37.5%

$1,080.4
891.9
365.3
413.5
41.0%

$1,214.3
977.7
536.6
311.5
54.9%

$1,454.9
1,167.50
607.7
421.7
52.1%

$2,062.6
1,634.50
889.3
516.0
54.4%

$2,501.4
2,007.50
1,071.60
628.2
53.4%

$2,904.7
2,330.70
1,115.30
675.6
47.9%

$3,663.8
2,861.40
1,192.30
848.5
41.7%

$4,579.3
3,561.80
1,662.80
991.0
46.7%

$5,370.5
4,247.80
2,498.80
810.8
58.8%

$0.25
0.29
0.026
2.28
2.43
183.6
13.9%

$0.34
0.39
0.034
2.58
3.48
160.5
17.0%

$0.45
0.52
0.042
2.49
6.35
125.3
23.8%

$0.57
0.64
0.051
3.22
7.18
130.8
23.4%

$0.61
0.69
0.063
3.89
11.70
132.8
20.0%

$0.78
0.83
0.076
4.67
14.25
134.4
20.0%

$1.00
1.04
0.093
5.25
14.70
128.8
22.1%

$1.24
1.24
0.113
6.48
21.56
131.0
22.1%

$1.40
1.40
0.136
7.59
29.75
130.6
20.6%

Per Share and Other Data

Earnings per share
Continuing operationsa
Net income
Cash dividends
Shareholders equity
Market price (year-end)
Shares outstanding (millions)
Return on average shareholders equity

Source: Company reports

a

The companys theme park operations were discontinued in 1984.

Funds provided from continuing operations consist of income from continuing operations plus depreciation, deferred income taxes, and other items not currently affecting working capital.

Total capital represents total assets less current liabilities.

$1.67
1.67
0.17
6.82
30.00
118.8
22.2%

Exhibit 2

Financial Summary by Business Segment, 1982-1987 (millions of dollars)

1982

1983

1984

1985

1986

1987

Lodging
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures

$1,091.7
132.6
909.7
22.7
371.5

$1,320.5
$1,640.8
$1,898.4
$2,233.1
$2,673.3
139.7
161.2
185.8
215.7
263.9
1,264.6
1,786.3
2,108.9
2,236.7
2,777.4
27.4
31.3
32.4
37.1
43.9
377.2
366.4
808.3
966.6
1,241.9

Contract Services
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures

819.8
51.0
373.3
22.9
127.7

950.6
71.1
391.6
26.1
43.8

1,111.3
86.8
403.9
28.9
55.6

1,586.3
118.6
624.4
40.2
125.9

2,236.1
154.9
1,070.2
61.1
448.7

2,969.0
170.6
1,237.7
75.3
112.7

547.4
48.5
452.2
25.1
199.6

679.4
63.8
483.0
31.8
65.0

707.0
79.7
496.7
35.5
72.3

757.0
78.2
582.6
34.8
128.4

797.3
79.1
562.3
38.1
64.0

879.9
82.4
567.6
42.1
79.6

Restaurants
Sales
Operating profit
Identifiable assets
Depreciation
Capital expenditures

Source: Company reports

Exhibit 3

Information on Comparable Hotel and Restaurant Companies

Arithmetic
Average
Returna

Geometric
Average
Returna

22.4%

21.4%

0.97

41%

$6.52

Hilton Hotels Corporation

(Owns, manages, licenses hotels;
operates casinos)

13.3

12.9

0.88

14%

0.77

Holiday Corporation
(Owns, manages, licenses hotels,
restaurants; operates casinos)

28.8

26.9

1.46

79%

1.66

La Quinta Motor Inns

(Owns, operates, licenses motor inns)

-6.4

-8.6

0.38

69%

0.17

Ramada Inns
(Owns, operates hotels, restaurants)

11.7

2.8

0.95

65%

0.75

Churchs Fried Chicken

(Owns, franchises restaurants, gaming
businesses)

-3.2

-7.3

0.75

4%

0.39

Collins Foods International

(Operates Kentucky Fried Chicken
franchise, moderately priced restaurants)

20.3

17.7

0.60

10%

0.57

Frischs Restaurants
(Operates, franchises restaurants)

56.9

49.7

0.13

6%

0.14

Lubys Cafeterias
(Operates cafeterias)

15.1

12.8

0.64

1%

0.23

McDonalds
(Operates, franchises, services
restaurants)

22.5

21.3

1.00

23%

4.89

Wendys International
(Operates, franchises, services
restaurants)

4.6

1.08

21%

1.05

Company and Nature of Business

Marriott Corporation
(Owns, operates, manages hotels,
restaurants, airline and institutional food
services)

-1.4

Source: Casewriters estimates.

a

Calculated over period 1983-1987.

Estimated by ordinary least-squares regression using daily data over 1986-1987 period.

Equity
Betab

Market
Leveragec

1987
Revenues
($ billions)

Book value of debt divided by the sum of the book value of debt plus the market value of equity.

Exhibit 4

Annual Holding-Period Returns for Selected Securities and Market Indexes, 1926-1987
Arithmetic
Average

Geometric
Average

Standard
Deviation

1926-1987

3.54%

3.48%

0.94%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

1.01
3.67
7.80
10.32
6.16
5.46

1.00
3.66
7.77
10.30
6.16
5.46

0.40
0.56
0.83
0.75
0.19
0.22

1926-1987

4.58%

4.27%

7.58%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

4.14
2.39
1.95
17.85
24.44
-2.69

4.04
2.22
1.69
16.82
24.44
-2.69

4.17
6.45
11.15
14.26
17.30

1926-1987

5.24%

4.93%

6.97%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

4.82
3.05
2.70
18.96
19.85
-0.27

4.76
2.86
2.39
17.83
19.85
-0.27

3.45
6.04
10.87
14.17
8.19

1926-1987

12.01%

9.90%

20.55%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

10.90
11.87
14.81
15.49
18.47
5.23

7.68
10.26
13.95
14.71
18.47
5.23

27.18
13.57
14.60
13.92
17.94
30.50

Short-Term Treasury Bill Returns

Long-Term U.S. Government Bond Returns

10.28

Long-Term, High-Grade Corporate Bond Returns

9.64

Standard & Poors 500 Composite Stock Index

Returns

Source: Casewriters estimates based on data from the University of Chicagos Center for Research in Security Prices.

Exhibit 5

Spreads between S&P 500 Composite Returns and Bond Rates, 1926-1987
Arithmetic
Average

Geometric
Average

Standard
Deviation

1926-1987

8.47%

6.42%

20.60%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

9.89
8.20
7.01
5.17
21.31
-0.23

6.68
6.60
6.18
4.41
12.31
-0.23

1926-1987

7.43%

5.63%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

6.76
9.48
12.86
-2.36
-5.97
7.92

3.64
8.04
12.26
-2.11
-5.97
7.92

1926-1987

6.77%

4.97%

1926-1950
1951-1975
1976-1980
1981-1985
1986
1987

6.08
8.82
12.11
-3.47
-1.38
5.50

2.92
7.40
11.56
-3.12
-1.38
5.50

Spread between S&P 500 Composite Returns and

Short-Term Treasury Bill Returns

27.18
13.71
14.60
14.15
17.92
30.61

Spread between S&P 500 Composite Returns and LongTerm U.S. Government Bond Returns
20.78%
26.94
14.35
15.58
13.70
14.76
35.35

Spread between S&P 500 Composite Returns and LongTerm, High-Grade Corporate Bond Returns
20.31%

Source: Casewriters estimates based on data from the University of Chicagos Center for Research in Security Prices.

26.70
13.15
15.84
13.59
14.72
34.06

MARRIOT CORPORATION
Computing Cost of Debt
Debt Rate Premium

1.30%

Long-term US Govt Interest Rate (for Lodging Division)

8.95%

Medium-term US Govt Interest Rate (for Restaurant &

Contract Services Divisions)
Company Borrowing Rate
Before Tax Cost of Debt (Rb)
Tax Rate (t)
After Tax Cost of Debt = (1-t) * Rb

8.72%
8.80%
10.10%
44.10%
5.64%

Computing Cost of Equity

Market Return
Risk-free Rate
Spread
Levered Beta
Market Leverage
Unlevered Beta
Firm Debt-to-Equity Ratio
Relevered Beta
Cost of Equity

9.90%
4.27%
5.63%
0.9700
41%
0.6986
1.5
1.2844
11.50%

WACC for the Firm

Weight of Debt
Weight of Equity
WACC

0.60
0.40
7.99%

LODGING DIVISION
Computing Cost of Debt
Debt Rate Premium

1.10%

Long-term US Govt Interest Rate (for Lodging Division)

8.95%

Lodging Division Borrowing Rate

Before Tax Cost of Debt (Rb)
Tax Rate (t)
After Tax Cost of Debt = (1-t) * Rb

8.95%
10.05%
44.10%
5.62%

Computing Cost of Equity

Market Return
Risk-free Rate
Spread

9.90%
4.27%
5.63%

Unlevered Beta (Average of 3 Companies)

Lodging Division Debt-to-Equity Ratio
Relevered Beta
Cost of Equity

0.3693
2.8461538462
0.9569
9.66%

WACC for Lodging Division

Weight of Debt
Weight of Equity
WACC

74%
26%
6.67%

PROXY COMPAY BETA COMPUTATIONS

Holiday Corporation
Levered Beta
Market Leverage
Unlevered Beta

1.46
79%
0.3066

La Quinta Motor Inns

Levered Beta
Market Leverage
Unlevered Beta

0.38
69%
0.1178

Ramada Inns
Levered Beta
Market Leverage
Unlevered Beta

0.95
65%
0.6835

RESTAURANTS DIVISION
Computing Cost of Debt
Debt Rate Premium

1.80%

Short-term US Govt Interest Rate (for Restaurants Division)

8.72%

Lodging Division Borrowing Rate

Before Tax Cost of Debt (Rb)
Tax Rate (t)
After Tax Cost of Debt = (1-t) * Rb

8.72%
10.52%
44.10%
5.88%

Computing Cost of Equity

Market Return
Risk-free Rate
Spread

9.90%
4.27%
5.63%

Unlevered Beta
Restaurants Division Debt-to-Equity Ratio
Relevered Beta
Cost of Equity

0.7253
0.724137931
1.0189
10.01%

WACC for Restaurants Division

Weight of Debt
Weight of Equity
WACC

42%
58%
8.27%

PROXY COMPAY BETA COMPUTATIONS

McDonalds
Levered Beta
Market Leverage
Unlevered Beta

1
23%
0.7700

Wendys International
Levered Beta
Market Leverage
Unlevered Beta

1.08
21%
0.8532

Collins Foods International

Levered Beta
Market Leverage
Unlevered Beta

0.6
10%
0.5527

CONTRACT SERVICES DIVISION

Computing Cost of Debt
Debt Rate Premium

1.40%

Short-term US Govt Interest Rate (for Contract Services Division)

8.72%

Lodging Division Borrowing Rate

Before Tax Cost of Debt (Rb)
Tax Rate (t)
After Tax Cost of Debt = (1-t) * Rb

8.72%
10.12%
44.10%
5.66%

Computing Cost of Equity

Market Return
Risk-free Rate
Spread

9.90%
4.27%
5.63%

Unlevered Beta
Contract Services Division Debt-to-Equity Ratio
Relevered Beta
Cost of Equity

1.43
0.6666667
1.9566
15.29%

WACC for Contract Services Division

Weight of Debt
Weight of Equity
WACC

40%
60%
11.43%

COMPUTATION OF UNLEVERED BETA FOR CONTRACT SERVICES

Lodging
Contract Services
Restaurant
Marriott

Identifiable Assets

Divisional Assets / Firm Aseets

Unlevered Beta

2777.4
1237.7
567.6
4582.7

0.61
0.27
0.12

0.37
1.43
0.73
0.70