Analyzing Financial Reports

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You have made excellent progress on the Choice Hotels project, and your contributions at the recent ethics retreat were well received! Senior Partner Frank Marinara and Managing Director Elisa Izuki have discussed your work and have decided to promote you to senior analyst. “Congratulations!” Frank says. “Because of your great work with Choice Hotels, the client would like us to continue working with them on a new project. I’ll send over the project details to you via email.

This is great news! You are excited about your new title and the progress of MCS and are eager to prove why you were selected for promotion.

INBOX (1 NEW EMAIL)

From: Frank Marinara, Director of Finance

To: You

I know you will do an outstanding job in your new role and I am looking forward to seeing you continue your positive momentum. I am also being promoted to director, and Elisa will now be serving in a senior director capacity.

This should be a fitting project for you as our newest senior partner. Choice Hotels would now like MCS to complete a financial statement comparison with their largest competitor, Marriott International. Since we need to know how Choice Hotels compares with Marriott, I need you to compare Choice Hotels’ 10-K reports that we gathered in the last project with Marriott International’s 10-K reports. You’ll need to complete a horizontal and vertical financial statement analysis using the 10-K reports from Choice and Marriott.

Choice Hotels is also interested in bolstering their assets to make themselves more attractive to potential investors. As they build these assets, they will need our help analyzing different cost allocation methods and recommending the best one for their circumstances.

Finally, we will need to look at Choice Hotels’ latest 10-Q reports and complete a budget and forecast model to see if they would be an attractive acquisition for a large equity firm. And of course, you will need to host a meeting with the other finance and accounting analysts to discuss whether the equity firm would be more likely to acquire Choice or Marriott.

I’ll need all of these assignments done within two weeks and suggest you begin right away.

Really proud of your efforts here,

Frank

rank Marinara Contact Information

Click Step 1 to get started!

When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.

· 1.3: Provide sufficient, correctly cited support that substantiates the writer’s ideas.

· 1.6: Follow conventions of Standard Written English.

· 3.1: Identify numerical or mathematical information that is relevant in a problem or situation.

· 3.2: Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.

· 3.3: Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.

· 3.4: Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.

· 10.2: Analyze financial statements to evaluate and optimize organizational performance.

· 10.3: Determine optimal financial decisions in pursuit of an organization's goals.

· 10.5: Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.

· 12.1: Assess market risk and opportunity.

· 13.1: Identify and analyze new opportunities.

Step 1: Compare Business Performance Using Financial Statements

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Choice Hotels International (NYSE:CHH) would like to know how their market share compares with Marriott International (NASDAQ:MAR), their largest competitor in North America. This comparison will help Choice Hotels develop a strategy to gain a competitive advantage over Marriott.

Choice would like MCS to first complete a financial statement analysis with Marriott International.

Dialogue with Frank Marinara

“Use the Choice Hotels 10-K reports we gathered in the last project and compare them with Marriott International’s 10-K reports,” Frank tells you. You will need to find Marriott’s 10-K reports the same way you did for Choice Hotels, by accessing the Securities Exchange Commission (SEC) website.

Frank continues, “Choice has asked for advice on attracting new investors. You need to complete a horizontal analysis and vertical analysis by comparing financial reports and measuring the difference between the two companies.” Frank recommends using financial ratios for analysis and cost-volume-profit analysis concepts for this task. “I’ll email you an Excel Workbook to complete for this project.”

INBOX (1 NEW EMAIL)

From: Frank Marinara, Director of Finance

To: You

For this assignment, please complete the Project 3 Excel Workbook with information from the income statement, balance sheet, and statement of cash flow portions of Choice Hotels’ and Marriott International’s 10-K reports. The file contains instructions, an income statement template, balance sheet template, and a cash flow template. I have also posed questions for you to answer so I can provide Choice Hotels with suggestions on improving their financial performance.

Thanks,

Frank

ATTACHMENTS

Choice Hotels Workbook.xlsx

rank Marinara Contact Information

Answer the associated questions on the Income Statement, Balance Sheet, and Cash Flow worksheets within the Project 3 Excel Workbook to help Choice Hotels make sound investment decisions. When you have finished, submit the workbook to the submission folder located in the final step of this project. You should aim to complete this step during Week 6.

Now that you have completed Step 1, proceed to Step 2, where you will analyze potential investment decisions.

Step 2: Analyze Cost and Investment Decisions

The client, Choice Hotels, is also interested in bolstering their assets and improving their costing model to account for these assets. Choice has been building their own guest rooms and selling them to Choice Hotels franchise owners. The company allocates overhead costs equally to each guest room and prices them to achieve a greater profit on the higher-priced guest room. Choice Hotels is concerned that this traditional costing model may not be accurately assigning costs based on activities, and the selling price of one of its guest rooms, Presidential Suite, may not be covering its true cost. You will need to know the marginal costs, incremental costs, cost of equity, cost of debt, and the pros and cons of debt vs. equity to advise Choice Hotels on resolving the company’s costing issue with the Presidential Suite guest room.

In addition, you will need to understand the concepts of activity-based costing (ABC), production cost allocation, and breakeven to put together an analysis that compares costing models that account for Choice’s guest room sales. Two cost allocation methods of production are being considered. Frank needs your help determining if overhead cost allocation (Choice’s traditional model) or ABC (a new model) is best to use in this case.

Using the same Project 3 Excel Workbook you used in Step 1, complete the Cost and Investing worksheet. The worksheet contains information that will aid in comparing the cost allocation methods for building guest rooms for Choice Hotels’ franchise owners. When you have finished, submit the workbook to the submission folder located in the final step of this project. Aim to complete this step during Week 6.

Then proceed to Step 3, where you will review and analyze the concepts of budgeting, forecasting, and profitability.

Step 3: Complete a Capital Budget and Profitability Analysis

Frank recently informed you that a large equity firm may be interested in acquiring either Choice Hotels or Marriott International. The client, Choice Hotels, would like to know if they would be a more attractive target for an acquisition than their competitor, Marriott International. Now you will need to determine if it would be more beneficial for the equity firm to acquire Choice Hotels or Marriott International. You will need to look at Choice Hotels’ and Marriott International’s latest 10-K reports and complete a budget and profitability analysis to see which acquisition, if any, should take place.

Since you are now a senior analyst, you know you have to learn more about capital budgeting analysis and profitability ratios to be able to develop a capital budget and profitability analysis.

You will also need to calculate the liquidity ratios and debt-management ratios to determine whether it is a viable option for the large equity firm to acquire Choice Hotels or Marriott International.

Using the same Project 3 Excel Workbook you used in Steps 1 and 2, complete the Budgeting and Profitability worksheets, where you will calculate the quick ratio, acid test ratio, debt ratio, basic earnings power ratio, return on equity, and return on assets ratios and answer questions to determine if the equity firm should acquire Choice Hotels or Marriott International. When you have finished, submit the workbook to the submission folder located in the final step of this project during Week 6.

Now that you have completed Step 3, proceed to Step 4, where you will discuss mergers and acquisitions with other finance and accounting analysts.

Step 4: Discuss Mergers and Acquisitions

Discussion with Colleagues

Earlier, Frank mentioned you would need to host a meeting with the other finance and accounting analysts at MCS to discuss the possibility of a large equity firm acquiring Choice Hotels or Marriott International and to determine the feasibility of these possibilities.

Assuming you and your MCS colleagues are attending the meeting, go to the Mergers and Acquisitions Discussion, and complete the following tasks:

· Discuss whether the large equity firm is more likely to acquire Choice Hotels or Marriott International and provide the reasons for your stance. Give credit to any sources you use to support your statements.

· Discuss how current Choice Hotels investors might be affected by an acquisition by a large equity firm. Give credit to any sources you use to support your statements.

· Later in the week, after you are back in your office, you have a follow-up discussion with your MCS colleagues in an effort to summarize the key lessons from your discussion on mergers and acquisitions at the meeting. Respond to your colleagues' original discussion posts and give credit to any sources you use to support your statements.

During Week 7, submit one original posting of at least 250 words in the Mergers and Acquisitions Discussion by Saturday and post two responses of at least 50 words each to other discussion participants by Tuesday. See MBA discussion guidelines.

When you have finished Step 4, proceed to Step 5, where you will review your recent findings in a report to management.

Step 5: Prepare a Report to Management

At the conclusion of your project, Frank requests a report based on your analysis and recommendations in the previous steps. He is planning on using this report to provide the client, Choice Hotels, with guidance on a potential acquisition. This report, along with citations for any sources you use, should be about three to five pages. The report should highlight your analysis and recommendations based on the work you completed in the workbook. Be creative and use charts, graphs, or any other tools you feel would be useful to convey your analysis and recommendations. Post your report to management in the submission folder located in the final step of this project.

Complete your report to management during Week 7 using this template.

When you have completed Step 5, proceed to Step 6, where you will submit all work for Project 3.

Step 6: Submit Your Work

Take note of the recommended delivery dates in the table below.