Marriott International Capital Structure
Ryan Larsen, Reagan Jamison, Andrew Buckworth, and Wanda R. Brown-Quill
FIN 419
February 15, 2016
Professor Sarah Newton
MARRIOTT INTERNATIONAL CAPITAL STRUCTURE / 1Marriott International Capital Structure Paper
Introduction – Wanda Quill
In addition to our Team’s previous reports, statistics, recommendations, and research, consider our findings, evaluations and comparisons in evaluating Marriott’s capital structure. We will briefly examine operating and financial leverage, based on an assumed long-term debt increase of 10%, and how it affects capital structure.We will present the connections to operating leverage, breakeven estimates, and conclude with our recommendations and documentation on why we believe continued support in Marriott International’s timeshare expansion will continue to optimize shareholder wealth.
Long-Term Debt Variations
Long term debt is described as an amount of money an organization owes for a certain period of time, but must be greater than 12 months from the current date. The long term debt is listed on an organizations balance along with interest rates and the date in which the debt will mature. We can calculate long term debt by dividing long term debt by total assets. Marriott International’s long term for the period ending September 2015 is $3.689M, their total assets were $6.153M giving them a ratio of .60. Long term debt is great financial measure of an organizations health, given Marriott International’s current long term debt ratio, they are in good financial standing.
Evaluation of Capital Structure in Connection to Operating and Financial Leverage – WB
The capital structure formula is Debt ratio =
With a debt ratio of holding at 10%, and now entertaining an increase of 10% means that Equity ratio would be 80%. Debt-to-Equity ratio is equal to D/E = 3, and the DR would be equal to 75%. The relationship between debt and equity also describes capital structure. By using calculations, debt-to-equity ratio reveals the amount of debt that Marriott has per dollar of equity. Our goal is to increase stockholders wealth, so in the overture of operations, fixed and variable operating costs for Marriott’s breakeven point and its operating leverage is essential because these costs alter risk and return. Leverage refers to the effects that fixed costs have on the returns that shareholders earn. Higher leverage results in higher but more volatile returns. The mix of long-term debt and equity maintained by the firm equals its capital structure (Gitman & Zutter, 2014). Illustrated below, we can see how financial and operating leverage make up the total leverage within a business structure.
Operating leverage and financial leverage are interrelated. Optimal capital structure demands less debt and less operating leverage call for more debt. The formula for calculating operating leverage divides the percent change in EBIT by the percent change in sales. Marriott Internationals 10% increase in long-term debt, at the same current cost of long-term debt, assuming that sales also increased by at least 20%, which would make the degree of operating leverage 2 or 20%.
There are three ways in which one cam measure the strength of a company’s balance sheet: (1) capital structure, (2) asset performance, and (3) working capital adequacy. Equity is a blend of a company's common and preferred stock plus retained earnings. This invested capital and debt, which is usually long-term, outfits the funding to support a company's growth and its assets.Debt may also be viewed as an expression of a balance sheet’s long-term debt component of a company’s capitalization. Debt generate additional financing, the company enjoys increased leverage, in that the more timeshares sold, the more revenue is available to shareholders. The debt component of a company's capitalization may include the current portion of long-term debt,short-term borrowings (notes payable), long-term debt, and two-thirds of the principal amount of operating leases and redeemable preferred stock.
In contrasting equity vs. debt, we must consider advantages and disadvantages. Debt can increase the financial resources needed for additional timeshare expansion. Per contra, if a company is too highly leveragedcosts can eat into profits, leaving a company vulnerable. Evaluating breakpoints and determining whether to finance further and implement timeshare expansion on both east and west coast require consideringwhether to finance with debt or equity.
The first step in finding the operating breakeven point is to divide the cost of goods sold and operating expenses into fixed and variable operating costs. Fixed costs are costs that the firm must pay in a given period regardless of the sales volume achieved during that period. These costs are typically contractual; rent, for example, is a fixed cost. The degree of operating leverage is a numerical measure of the firm’s operating leverage.
Inclusive to evaluating capital structure as it relates to operating and financial leverage is the break-even analysis. Break-even analysis, also called cost-volume-profit analysis, is used by the firm to determine the level of operations necessary to cover all operating costs and to evaluate the profitability associated with various levels of sales. To determine the number of timeshare units that must be sold to break even; refer below:
Recommendations for Optimal Capital Structure In connection with Maximizing Shareholders Wealth
Calculations and Analysis in support of Recommendations for Optimal Capital Structure in Connection with Shareholders Wealth
Capital Structure in Review
References
Acquire Media and PR Newswire. (2016). Marriott International, Inc. Retrieved from
Gitman, L., & Zutter, C. (2014). Principles of Managerial Finance (14th ed.). Upper Saddle River, NJ: Prentice Hall.
Marriott International, Inc. Corporate Headquarters Form 8-k. (January 26, 2016). United States Security Exchange Commission, 1-13881(99), IRPR#1. Retrieved from
U.S. Securities and Exchange Commission. (2015). Marriott International Inc /MD/ (Filer) CIK: 0001048286 Share-Based Compensation. Retrieved from