WMT Equity The beta for Wal-Mart, according to MSN Moneycentral, is 0.29. According to Yahoo! Finance the yield to maturity on a Treasury bond that is due 15-Mar-12 is 0.296%. We will assume a market risk premium of 7%. With these figures, the cost of equity for Wal-Mart can be calculated using the capital asset pricing model (CAPM):

Ra = RF + ? (Rm -- Rf)

Ra = 0.296 + (.29)(7)

Ra = 2.326%

This cost of equity is lower than I had expected. In general, the cost of equity for a firm is fairly high. The reason why Wal-Mart has such a low cost of equity is that the company's beta is so low. Wal-Mart has very little correlation with the broad market, and is not very volatile. As a result, Wal-Mart's cost of equity is low, because it is much less risky than the market...

Given its beta, Wal-Mart should have a cost of equity lower than that of the market, so the beta makes sense.
The beta for Target is 0.96. The beta for Costco is 0.74. The cost of equity for Target is as follows:

0.296 + (.96)(7) = 7.016%

The cost of equity for Costco is:

0.296 + (.74)(7) = 5.476%

I am not surprised that Target has a higher cost of equity than Wal-Mart. I had predicted that for a number of reasons Target is a riskier company and therefore a greater risk premium would be required to make an investment in Target.

What does surprise me is that Costco has a higher cost of equity than does Wal-Mart. I felt Costco might be a bit less risky. However, part of that assessment was based on future expectations,…