The Marriott Cost of Capital case is a classic example of how a company can use financial analysis to make informed decisions about capital investment. In this case, Marriott International, a leading hotel and hospitality company, is considering expanding its portfolio by acquiring a new hotel chain. To make this decision, Marriott needs to estimate the cost of capital for the acquisition and determine whether it is financially viable.
One way to approach this problem is to use an Excel spreadsheet to perform a cost of capital analysis. This involves calculating the required rate of return for the acquisition, which is used to determine the value of the investment. The required rate of return represents the minimum return that an investor expects to receive on an investment. If the expected return is higher than the required rate of return, the investment is considered to be financially viable.
To calculate the required rate of return, we first need to gather some information about the company and the investment. This includes the company's financial statements, industry data, and market conditions. From this information, we can calculate the cost of equity and the cost of debt.
The cost of equity represents the return that shareholders expect to receive on their investment in the company. It is calculated using the capital asset pricing model (CAPM), which takes into account the risk-free rate of return, the market risk premium, and the company's beta. Beta is a measure of the company's volatility compared to the overall market.
The cost of debt represents the return that investors expect to receive on their investment in the company's debt. It is calculated by taking the company's interest rate and adding a risk premium to reflect the credit risk of the company.
Once we have calculated the cost of equity and the cost of debt, we can use the weighted average cost of capital (WACC) formula to determine the overall required rate of return for the acquisition. The WACC is calculated by weighing the cost of equity and the cost of debt according to the proportion of each in the company's capital structure.
In the Marriott Cost of Capital case, we can use this information to determine whether the acquisition is financially viable. If the expected return on the investment is higher than the required rate of return, the acquisition is likely to be a good financial decision. If the expected return is lower than the required rate of return, the acquisition may not be a good financial decision.
Overall, the Marriott Cost of Capital case illustrates the importance of using financial analysis to make informed decisions about capital investment. By using tools like Excel to perform a cost of capital analysis, companies can make sound financial decisions that help them grow and succeed in the long term.