Wmt in Order for Wal-Mart

WMT In order for Wal-Mart to determine how much it can borrow, the company must consider its current capital structure. The primary constraint on borrowing is going to be the company's liquidity and solvency position, which is related to its debt level. At the end of fiscal 2008, the company's level of long-term debt was $29.799 billion, up from $27.222 billion the year before. The company's current ratio was 0.81, down from 0.90 the year before. The debt-to-equity ratio is 1.53, up from 1.46 the year before.

So Wal-Mart's financial condition has deteriorated over the past year as the company has taken on an increased amount of debt. In terms of liquidity, Wal-Mart can generally borrow to the point where its current ratio is down to 0.25 or 0.20. These numbers are arbitrary, but the reason it is believed that Wal-Mart can borrow down to this level is that the company has strong earning. These earnings can help to pay down any debt that is acquired.

As long as the Wal-Mart franchise is strong, the company will continue to be able to borrow. The debt-to-equity ratio could go upwards of 4 times, which would imply a debt load of $258.4 billion, which implies $159.526 in additional debt financing. It is unlikely, however, that Wal-Mart would borrow to this level. The company's debt load is more likely to be constrained by its debt policy, which in turn will be dictated by the optimal capital structure.

Debt financing typically comes at a lower cost than equity financing, because it is subject to a lower degree of risk. As such, companies typically incorporate some amount of debt into their capital structure in order to lower borrowing costs. For a firm like Wal-Mart that competes on a cost leadership strategy, lowering the cost of capital can help the company to compete. Wal-Mart's capital structure is relatively debt-heavy. For the end of fiscal 2008, Target had a debt/equity ratio of 0.4, indicating a capital structure more oriented towards equity financing.

Costco had a debt/equity ratio of 1.25, again lower than that of Wal-Mart (MSN Moneycentral, 2010). These competitors provide interesting comparables in that neither is as heavily leveraged as Wal-Mart. They are very large companies with stable cash flow, just like Wal-Mart, but have chosen to take on less debt in their capital structure. The financial crisis has also had an impact on Wal-Mart's capital structure. When planning the optimal capital structure, firms need to consider the ability of the company to whether economic slowdowns.

In Wal-Mart's case, the impacts of the slowdown were delayed somewhat, but eventually sales began to slump. The company increased its long-term debt in both 2009 and 2010. The debt/equity ratio increased to 1.50 in 2009 but then decreased in 2010 to 1.41, close to the level of two years prior. This indicates.