0. Introduction and Diagnosis This case is an example of expropriation of the bondholders of a firm. On October 5, 1992 Marriott announced that it would split the company into two separate firms: a hotel management company and a real estate company. They also arranged for the debt of the firm to be allocated almost completely to the real estate company. This was a response, in part, to the historically high levels of debt and commensurately low credit ratings of the company. However, 81% of the cash flows were generated by the hotel management company. Since the risk of the existing debt was greatly increased, the value of the debt was greatly decreased. This reduction of value for the debt holders resulted in an increase in the value of Marriott equity, a wealth transfer from debt holders to equity holders should occur. Marriott spin-off the firm allocated its debt to its poorer performing assets. Table 2, illustrates that the subsidiaries have leverage greater than predicted when they have higher ROA. Since the spin-off unit is much smaller than the parent. The parent firm b......

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