Wal-Mart an Example of a Short-Term Project

Wal-Mart An example of a short-term project that Wal-Mart undertakes is opening a new store. The company regularly opens new stores, and it takes several months from start to finish for the project. New stores have a relatively infinite life, so they are a capital project, but they are short-term in nature before they begin earning revenues of their own. The life span of the project indicates that equity may be more appropriate for this project.

For a short-term project, equity typically comes from working capital by way of retained earnings. For a short-term project at Wal-Mart financing should be done from cash. The financing decision should be made on the basis of a company's ideal capital structure and the cost of capital, but also should be made with consideration for the company's existing balance sheet. For Wal-Mart, the balance sheet has sufficient capital - $7 billion in cash for example -- that the company can finance any operating expense from its existing working capital.

One of the important principles in the financing decision is that the time frame of the financing should match the time frame of the project. This means that projects within the context of everyday operations should be financed through the company's operations. An example of a long-term project at Wal-Mart is building a new IT system to help route goods through the company's network of warehouses. The project is expected to have a usable life of twenty years.

Because the cost of the project will run into the hundreds of millions, it is considered to be a long-term capital project for budgeting purposes. The new IT system is expected to result in direct cost savings for the company. Financing a long-term project is more challenging. The nature of the long-term project is important as some projects have finite lives while others have relatively infinite lives. However, the firm's ideal capital structure is also something that needs to be considered. Typically, debt financing is cheaper than equity financing.

However, the cost of debt must be balanced by the fact that the debt represents an obligation that must be met before earnings can be plowed back into the company or distributed to the shareholders. Thus, debt increases the risk level of the organization. It is worth considering that Wal-Mart has tight margins, which means that the firm has a relatively low amount of free cash flow once expenses are paid. Wal-Mart may have a lot of cash, but it uses most of it in the course of its operations.

Wal-Mart's current balance sheet shows roughly 62% liabilities and 38% equity. This implies that Wal-Mart is already a highly leveraged organization. While Wal-Mart is an expanding company, its core U.S. market is more or less mature. Thus, for any project within the U.S., equity financing should be used where possible, to limit the growth in Wal-Mart's debt burden. Equity financing will avoid the debt burden. It is worth considering that Wal-Mart has access to capital today that it can use to finance this project.

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