Assignments from the Readings October 17, 2011 ACC/400 University of Phoenix John R. Triplett Team B: Assignment from the Readings Ch. 11: Interpreting Financial Statements BYP11-4 BYP11-4 Marriott Corporation split into two companies: Host Marriott Corporation and Marriott International. Host Marriott retained ownership of the corporation’s vast hotel and other properties, while Marriott International, rather than owning hotels, managed them.
The purpose of this split was to free Marriott International from the “baggage” associated with Host Marriott, thus allowing it to be more aggressive in its pursuit of growth. The following information (in millions) is provided for each corporation for their first full year operating as independent companies. Host Marriott Marriott International Sales $1,501 $8,415 Net income (25) 200 Total assets 3,822 3,207 Total liabilities 3,112 2,440 Stockholders’ equity 710 767 Instructions a) The two companies were split by the issuance of shares of Marriott International to all shareholders of the previous combined company. Discuss the nature of this transaction. The transaction suggest that the plan was to split one company into two companies while ensuring that all shareholders of the one company received equal share of stocks between the new two companies. (b) Calculate the debt to total assets ratio for each company. Debt to total assets ratio: Host Marriott – ($3,112 /$3,822) = 1. 23%
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Marriott International – ($2,440 / $3,207) = 1. 31% (c) Calculate the return on assets and return on common stockholders’ equity ratios for each company. Return on Assets: Host Marriott – (25)/3822= . 0065 Marriott Intl – 200/3207= . 0624 (d) The company’s debt holders were fiercely opposed to the original plan to split the two companies because the original plan had Host Marriott absorbing the majority of the company’s debt. They relented only when Marriott International agreed to absorb a larger share of the debt.
Discuss the possible reasons the debt holders were opposed to the plan to split the company. The debt holders were more than likely opposed the splitting of the company because they would not make a profit and would run the risk of being stuck with all of the debt. The debt holders felt the split was unfair since the debt resulted from business done as one company. In order to afford both companies a fair opportunity for success it’s only fair to assign a fair amount of debt between each company.