Walmart Cost of Capital: WACC and CAPM Analysis
This paper presents a structured analysis of Walmart's weighted average cost of capital (WACC). It examines the distinction between debt and equity financing, outlines the components of Walmart's cost of debt — derived from a recent 30-year bond issuance at 75 basis points above Treasuries — and applies the Capital Asset Pricing Model (CAPM) to estimate the cost of equity using Walmart's notably low beta of 0.37. Drawing on balance sheet data to establish the firm's capital structure (40.5% equity, 59.5% debt), the paper calculates a final WACC of approximately 3.51%, concluding that Walmart's exceptional stock price stability drives an unusually low overall cost of capital.
- Introduction to WACC and Capital Structure: Defines WACC and its core components
- Equity vs. Debt: Risk and Cost Differences: Compares risk profiles and costs of debt vs. equity
- Estimating Walmart's Cost of Debt: Derives Walmart cost of debt from bond issuance
- Calculating the Cost of Equity Using CAPM: Applies CAPM with beta, risk-free rate, and market premium
- Walmart's Capital Structure and WACC Calculation: Combines capital weights to compute final WACC
- Conclusions: Interprets Walmart's unusually low cost of capital
✍️ How to write this paper — guide, tools & examples ▾
What makes this paper effective
- Each component of the WACC formula is introduced and explained before any numbers are applied, giving the reader a logical conceptual foundation.
- Real, contemporaneous market data — including a recent Walmart bond issuance, live Treasury yields, and a published beta — anchor the analysis in verifiable evidence rather than assumptions.
- The paper explicitly notes a counterintuitive finding (cost of equity falling below cost of debt) and explains why it occurs, demonstrating critical engagement with the results.
Key academic technique demonstrated
The paper demonstrates step-by-step quantitative decomposition: it isolates each variable in a financial formula (risk-free rate, market risk premium, beta, capital weights), sources each from a credible reference, and then assembles them into a final calculation. This technique shows how to make a multi-variable financial model transparent and auditable.
Structure breakdown
The paper follows a build-up structure: it opens with the WACC framework, then develops each input in sequence (debt cost → equity cost components → capital weights), and closes with the final WACC calculation and a brief interpretive conclusion. Each section feeds directly into the next, making the argument cumulative and easy to follow.
Introduction to WACC and Capital Structure
The weighted average cost of capital (WACC) is the blended rate a company is expected to pay to finance its assets, weighted according to the proportion of each financing source. The capital structure of a firm consists of two main components: debt and equity. Because Walmart does not have preferred shares, they can be excluded from this calculation. Since the cost of equity and the cost of debt differ, the WACC is calculated as the weighted average of both, combining them in proportion to their share of the company's total financing.
Equity vs. Debt: Risk and Cost Differences
The choice between equity and debt reflects a trade-off among several factors, including risk, control, and access to capital. The risk characteristics of equity and debt differ significantly, which is the primary reason they carry different costs to the company. Equity payouts are subordinated to debt payouts: debt is serviced on a pre-tax basis, while equity payouts occur on an after-tax basis. As a result, debtholders bear lower risk and therefore demand a lower return. Equity shareholders, who bear higher risk, demand a higher return. For nearly any company, the cost of debt will therefore be lower than the cost of equity.
Estimating Walmart's Cost of Debt
There are several components to the cost of debt. One cannot simply use the face-value interest rate, because it may not reflect current market conditions. If a company has recently issued debt, that issuance offers the most straightforward basis for estimating the cost of debt. If no recent issuance exists, further research is required.
The cost of debt can be found by examining the prevailing yield on the company's outstanding bonds, if any exist. This yield represents the rate the company would have to pay if it issued that debt today. In practice, the cost of debt is typically estimated because either the company has no bonds, or it has many issued at different times. Best practice is to select a yield that reflects the time remaining on the company's current outstanding bonds.
Just a few months prior to this analysis, Walmart issued debt privately on a 30-year term at 75 basis points above Treasuries (Smith & Boyle, 2017). There is no reason to believe this spread has changed, as Walmart's underlying financial condition remained stable during that period. The company's bond rating was affirmed in 2015 and has not changed since (Moody's, 2015). With the current rate on 30-year U.S. Treasury securities at 2.88%, this puts Walmart's cost of debt at 3.63%.
References
Fernandez, P., Aguirreamalloa, J., & Corres, L. (2011). Market risk premium used in 56 countries in 2011: A survey with 6,014 answers. IESE Business School – University of Navarra. Retrieved January 10, 2018, from
Investopedia. (2018). Capital asset pricing model. Retrieved January 10, 2018, from https://www.investopedia.com/terms/c/capm.asp
Investopedia. (2018). Weighted average cost of capital. 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. 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. Retrieved January 10, 2018, from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Walmart 2017 Annual Report. Retrieved January 10, 2018, from ).pdf
Always verify citation format against your institution’s current style guide requirements.