Choice Hotels (Weighted Average Cost of Capital (WACC) Analysis)
Helpful Information for Choice Hotels's Analysis
What is the WACC Formula? Analyst use the WACC Discount Rate (weighted average cost of capital) to determine Choice Hotels's investment risk. WACC Formula = Cost of Equity (CAPM) * Common Equity + (Cost of Debt) * Total Debt. The result of this calculation is an essential input for the discounted cash flow (DCF) analysis for Choice Hotels. Value Investing Importance? This method is widely used by investment professionals to determine the correct price for investments in Choice Hotels before they make value investing decisions. This WACC analysis is used in Choice Hotels's discounted cash flow (DCF) valuation and see how the WACC calculation affect's Choice Hotels's company valuation.
WACC Analysis Information
1. The WACC (discount rate) calculation for Choice Hotels uses comparable companies to produce a single WACC (discount rate). An industry average WACC (discount rate) is the most accurate for Choice Hotels over the long term. If there are any short-term differences between the industry WACC and Choice Hotels's WACC (discount rate), then Choice Hotels is more likely to revert to the industry WACC (discount rate) over the long term.
2. The WACC calculation uses the higher of Choice Hotels's WACC or the risk free rate, because no investment can have a cost of capital that is better than risk free. This situation may occur if the beta is negative and Choice Hotels uses a significant proportion of equity capital.