Verified Document

Wal Mart CAPM And WACC Creative Writing

Related Topics:

Wal-Mart cost of capital

Slide 1: The WACC is the weighted-average cost of capital. The capital structure of a firm consists of two main components debt and equity. Wal-Mart does not have preferred shares, so they can be excluded from this calculation. The cost of equity and cost of debt are different, so the weighted average cost of capital is the weighted average of the cost of equity and the cost of debt, as illustrated in the following formula:

Slide 2: Equity versus Debt

The choice between equity and debt reflects the trade-off between a number of different factors, including risk, control and access to capital. The risk characteristics of equity and debt are different, which is the main reason that they have different costs to the company. Equity payouts are subordinated to debt payouts, because debt payouts are done on a pre-tax basis and equity pay-outs are done on an after-tax basis. Thus, debtholders have lower risk, and demand a lower return. Equity shareholders, having higher risk, demand a higher return. For almost any company, the cost of debt will thus be lower than the cost of equity.

Slide 3: Cost of Debt

There are several components to the cost of debt. One cannot look at the face value interest rate, because that does not reflect today's market conditions. If the company has recently issued debt, that would be the easiest way to estimate the cost of debt. If there has not been a recent debt issue, then further research will need to be conducted.

Thus, the cost of debt can be found looking at the prevailing yield on the company's bonds, if they have any. This is the rate that the company would have to pay if it issued that debt today. The cost of debt will typically be estimated, because either the company does not have any bonds, or it has many, at different time periods. The best practice for determining which yield makes the most sense to build into the cost of debt should reflect the time period remaining on the company's current outstanding bonds.

Slide 4: Wal-Mart Cost of Debt

Just a couple of months ago, Wal-Mart issued debt privately. The debt was 30-year term, at 75 basis points above Treasuries (Smith & Boyle, 2017). There is no reason to...

…company's stock price is.

Slide 11: Wal-Mart's Capital Structure

Circling back to the weighted average cost of capital, we need to determine the capital structure for Wal-Mart. This can be done by looking at the company's balance sheet. The total value of the company is $198,825 billion. Of this, the total value of shareholders' equity is $80,535 billion. This means that equity comprises 40.5% of the capital structure for Wal-Mart. There are no preferred shares, so the remainder is debt, which is 59.5% of the capital structure.

Slide 12: Weighted Average Cost of Capital

To calculate the WACC, you take the weights for debt and equity and applies the costs of each:

(.405)*(3.34) + (.595)*(3.63) = 1.354 + 2.159 = 3.513 %

Slide 13: Conclusions

Wal-Mart has an unusually low cost of capital. This is because the company has an unusually low cost of equity. With a very low beta, Wal-Mart equity is incredibly stable for investors, with risk nearly one-third of the market as a whole. This stability means that whether debt or equity, Wal-Mart's returns are very reliable. Indeed, recent upticks in the Treasury rates, even just since the company's most recent debt issue, have…

Sources used in this document:

References

Fernandez, P., Aguirreamalloa, J. & Corres, L. (2011). Market risk premium used in 56 countries in 2011: A survey with 6014 answers. IESE Business School – University of Navarra. Retrieved January 10, 2018 from https://core.ac.uk/download/pdf/6315942.pdf

Investopedia (2018) Capital asset pricing model. Investopedia. Retrieved January 10, 2018 from https://www.investopedia.com/terms/c/capm.asp

Investopedia (2018) Weighted average cost of capital Investopedia. Retrieved January 10, 2018 from https://www.investopedia.com/terms/w/wacc.asp

Moody's (2015) Moody's affirms Wal-Mart's ratings: Aa2 long-term and Prime 1 short-term. Moody's. Retrieved January 10, 2018 from https://www.moodys.com/research/Moodys-affirms-Walmarts-ratings-Aa2-long-term-and-Prime-1--PR_336536

MSN Moneycentral: Wal-Mart. (2018) Retrieved January 10, 2018 from https://www.msn.com/en-us/money/stockdetails/fi-126.1.WMT.NYS

Smith, M. & Boyle, M. (2017). Wal-Mart sells $6 billion of debt with Amazon battle heating up. Bloomberg. Retrieved January 10, 2018 from https://www.bloomberg.com/news/articles/2017-10-11/wal-mart-offers-bonds-to-retire-debt-as-amazon-battle-heats-up

US Department of the Treasury (2018) Daily Treasury yield curve rates. US Department of the Treasury. Retrieved January 10, 2018 from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Wal-Mart 2017 Annual Report. Retrieved January 10, 2018 from http://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-(1).pdf

Cite this Document:
Copy Bibliography Citation

Related Documents

Wal-Mart's SWOT Analysis and Generic Business-Level Strategy
Words: 2841 Length: 10 Document Type: SWOT

Wal-Mart's SWOT Analysis and Generic Business-Level Strategy Walmart's SWOT Analysis Wal-Mart's SWOT Analysis and Generic Business-Level Strategy Wal-Mart's SWOT Analysis and Generic Business-Level Strategy Wal-Mart Wal-Mart is the world's leading corporation in the retail industry. It operates in 27 countries of the world with 69 well-recognized brands. With this huge scale of operations and vast business network, Wal-Mart serves a large number of customers with numerous product categories in its retail stores, departmental stores, and

Wal-Mart: Financial Statement Analysis WAL-MART Financial Statement...
Words: 3639 Length: 13 Document Type: Essay

Wal-Mart: Financial Statement Analysis WAL-MART FINANCIAL STATEMENT ANALYSIS Company Description Wal-Mart Stores Inc. (WMT) is a world largest grocery chain and retail stores. The company operates 8000 stores across three business segments which include apparel, groceries, electronics and small appliances. While the company operates globally, half of the company stores are located in the United States. To complete in the international markets, Wal-Mart also operates its business through subsidiaries in Canada, Argentina, China,

Wal-Mart Is the Name That Is Well-Known
Words: 2391 Length: 8 Document Type: Research Paper

Wal-Mart is the name that is well-known to all the households these days because it has established itself as the largest retailer the world over. The sales of Wal-Mart are growing with every passing day as the sales totaled up to more than $280 billion, according to the reports published in 2004. However, it should be noted Wal-Mart did not appear on the international with more than 4500 stores in

Wal-Mart Porters Wal-Mart Strategic Management Wal-Mart Mission
Words: 827 Length: 3 Document Type: Essay

Wal-Mart Porters Wal-Mart Strategic Management Wal-Mart mission is based on the model that by simply saving people money so they can live better. The philosophy and overall business strategy was developed based on a simple idea created by founder Sam Walton: offer shoppers lower prices than they can get anywhere else. This strategy has been the basis of an incredible history and growth record for the company. This strategy still guides the

Wal-Mart's Strategic and Financial Planning: Since Its
Words: 1254 Length: 4 Document Type: Essay

Wal-Mart's Strategic And Financial Planning: Since its inception about 50 years ago, Wal-Mart has continued to remarkable growth as a firm that focuses on providing customers with a wide range of merchandise at great prices. In its initial years, the company only operated in one store that has contributed to changes in the way retail works. Currently, the firm operates over 10,000 retail units within 69 distinct banners in 27 countries

Wal-Mart and Employee Rights Labor Cost Is
Words: 3810 Length: 12 Document Type: Essay

Wal-Mart and Employee Rights Labor cost is always considered as the main issue, mostly in case of employees' unionization at Wal-Mart. This was noticed when Wal-Mart showed a remarkable earning at the rate of 44% per annum for its labor working on hourly basis. Another point which brought this issue ahead was when the sales clerk of Wal-Mart in 2001 earned wages below Federal Poverty Scale. According to an issue of

Sign Up for Unlimited Study Help

Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.

Get Started Now