Institution Name: Jorge H. Steele
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The Current Situation of Marriot seems very attractive and efficient from the financial perspective. After locating over the financial well-being of the company, it is clearly found that the sales of the company is subjected to increase positively with each of the passing year. In the year 1984, the generated sales provision of the company is $ 3,525 Million which almost get double by the end of the year 1987. It went on a level of $ 6,522 Million. Same activity is found with the operational cash flow of the company, as it reached to a level of $ 472.8 Million by the end of the year 1987.
From the computation of the capital structure of the company, it is clearly found that the proportion of Debt in the Capital Structure is comparatively higher than the amount of the equity. The cost of debt in the Weighted Average Cost of Capital (WACC) of the company is 60% while it was 40% in terms of Equity. It was not an ideal one, and Marriot likes to have a 50:50 ratio for the same. With the repurchasing of 10 Million Shares worth $ 235 Million, the company like to alter its proposal by increasing the amount of capital in their structure.
A. Low debt ratio might not be efficient for the big companies who are likely to accomplish something new in the market. It is clearly showing that the company might not achieve the operational asset base target with low debt factor.
B. Low debt ratio is essential, and companies which have lower debt factor in their capital structure are more efficient within the eyes of their shareholders comparing to the one which have higher amount of debt factor.
There is a strong connection among the capital structure or the debt factor with the stock prices of the company. With any change in the capital structure, its impact would be quite large on the Earnings per Share (EPS) of the company. If the debt of Marriot increases, the value of the EPS of the company will decrease and do impact over the stock price as well. This particular criteria is not applicable over the scenario of Modigliani-Miller world, but in the real time capacity, where taxes and inefficiencies are there this particular impact would be high.
Shareholders are now likely to put their money within the companies have high debt level, because of the restrictive covenants. Shareholders think that their money would have been vanished due to the same structure. However, in the context of debt with too low level, the company might not invest in the high profile operational assets, and their productivity got stuck in the middle. This particular factor doesn’t allow the company to expand their arms freely in the market to accomplish sensational growth.
There are numerous macroeconomic variables deem highly efficient and productive in the long run of the companies. It means that companies have to case study analysis help the impact of these variables to get an idea about their future consequences. Inflation is yet another major macroeconomic variable that do have an impact over the capital structure and the share pricing factor. This particular case is essential in Marriot case as well, because the company is likely to change their capital structure by buy backing their shares in the market. They are likely to increase their debt level by decreasing the capital values. Inflation will play an important role because the company will invest in one of the Treasury bond or stock to accomplish the same provision in their market.
The price of $23.50 would be a price for Bargain for the Shareholders. It means that they want their shareholders to purchase the shares in this particular price.
A. In order to tendering the price at $ 23.50, the researcher is likely to use Dividend Discount Model.
P = Dividend / Ke – g
= 0.8$ / 12% - 9% = 26.66$
The shareholders should tender to the price of $23.50 as it will be increasing for their efficiency
B. In this particular factor, Marriot should not buy back shares, as it may decrease the actual price of their shares, which will not be efficient for the shareholders.
The repurchasing of the shares might be efficient for the company in case of the shares are not presenting efficiently. But, in the context of Marriot, it is found that it is not consistent with the financial goals of the company. As repurchasing in this particular scenario will decrease the amount of the EPS of the company will be decreasing considerably.
References
Acharya, V., Drechsler, I., &Schnabl, P. (2014). A pyrrhic victory? Bank bailouts and sovereign credit risk. The Journal of Finance, 69(6), 2689-2739.
Alexander, C., &Kaeck, A. (2008). Regime dependent determinants of credit default swap spreads. Journal of Banking & Finance, 32(6), 1008-1021.
Ahmad, N. H., &Ariff, M. (2007). Multi-country study of bank credit risk determinants.
TCSS (30-03-2020)
FAH (30-03-2020)
