The four investment options are analyzed below:
The first alternative for the management of Marriott Corporation is to pay higher cash dividends to the shareholders of the company from the cash raised through the issuance of the debt. This would increase the share price of the company and it would attract new investors especially those that are dependent on dividends as their source of income rather than capital gains.
However, this option does not seem feasible and raising debt to pay dividends is not a good strategy for the future of the company. The company had started to pay dividends in the year 1977 and it had increased the dividends two times after that. Therefore, it was not feasible to increase the dividend substantially as stated in the annual report of the company. The company will also have to then maintain the same level of payout in the future, which might put the company at a big risk.
The second option available to the management of Marriott Corporation is to buy back the shares of the company from its existing shareholders. This seems to be a good option with minimum risk for the future of the company. If the company issues debt to buy back the shares of the company, then the share price would be increased and the wealth of the shareholders would be enhanced. The current share price of the company is around $ 14.9 per share as stated in exhibit 9.
This means that if the company utilizes the debt capacity of $ 235 million in 1980 then it will have to buy back around 15 million shares out of the current 32 million outstanding. This would increase the WACC of the company to 9.79% as shown in exhibit 4 but it would also increase the share price of the company significantly to $ 114.92 per share as shown in exhibit 5 in the appendices. As the company has also previously repurchased its stock therefore, this alternative seems to be a good option for the management.
The third alternative for the management is to invest the debt proceeds into the existing business of the company. This is also a good option however, it is important that a good opportunity exists for investment in the existing business. If the investment werelucrative,it would boost the sales of the company and the cash flows of the firm.
However, the company will have to ensure that it has enough cash to cover the debt obligations in future. Another important thing is that if the company wants to make investments in existing business then the covenants of the debt will have to be renegotiated with most of the insurance companies, which will be stricter then. All these factors need to be considered before going for this option.
The fourth alternative for the management is to acquire new companies and enhance its portfolio. If the company goes with this option then it will have to determine the fair value of the target and consider all the risks, If management fails to determine all the risks in the business then it could place huge constraints on the resources of the company. This option does not seem to be suitable because of the high market share of the company, large brand equity and excessive cash help by the company……………………….
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