Marriott Corporation: The Cost of Capital

In April 1988, Dan Cohrs, corruption superintendent of device finance at the Marriott Corporation, was preparing his annual recommendations for the hurdle rebukes at each of the firm's three removals. Investment devices at Marriott were clarified by discounting the alienate coin flows by the alienate hurdle rebuke for each removal. In 1987, Marriott's sales grew by 24% and its repay on equity easily-under at 22%. Sales and rights per divide had doubled balance the foregoing indecent years, and the unobstructed manoeuvre was aimed at constant this diverge. Marriott's 1987 annual repute stated: We design to rest a premier enlargement troop. This media aggressively developing alienate opportunities among our selected lines of business—lodging, reduce services, and cognate businesses. In each of these areas our end is to be the preferred master, the preferred provider, and the most remunerative troop. Mr. Cohrs normal that the removalal hurdle rebukes at Marriott would feel a telling consequence on the firm's financial and unobstructed strategies. As a administration of thumb, increasing the hurdle rebuke by 1% (for issue, from 12% to 12. 12%), decreases the introduce prize of device inflows by 1%. Because costs rested roughly agricultural, these changes in the prize of inflows translated into changes in the net introduce prize of devices . Figure A shows the corporeal consequence of hurdle rebukes on the anticipated net introduce prize of devices. If hurdle rebukes were to acception, Marriott's enlargement would be inaudible as uniformly remunerative devices no longer met the hurdle rebukes. Alternatively, if hurdle rebukes decreased, Marriott's enlargement would expedite. Marriott as-well considered using the hurdle rebukes to alloticularize stimulus allowance. Annual stimulus allowance constituted a telling fragment of sum allowance, ranging from 30% to 50% of infamous pay. Criteria for premium awards depended on specific job responsibilities but repeatedly interposed the rights flatten, the force of managers to confront budgets, and balanceall corporebuke operation. There was some concern, still, in basing the stimulus allowance, in allot, on a similitude of the removalal repay on net goods and the traffic-based removalal hurdle rebuke. The allowance drawing would then image hurdle rebukes, making managers past perceptive to Marriott's financial manoeuvre and excellent traffic provisions. Professor Richard Ruback dexterous this circumstance as the account for adjust discourse rather than to illustrebuke either consequenceive or inconducive handling of an authoritative plight. Copyright © 1998 by the Superintendent and Fellows of Harvard College. To prescribe copies or entreat leave to propagate materials, overcome 1-800-545-7685, transcribe Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu. No allot of this promulgation may be propagated, stored in a replacement rule, used in a spreadsheet, or transmitted in any construct or by any media—electronic, unreflective, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School.