Essay Undergraduate 883 words

Walmart Cost of Equity: CAPM and Dividend Growth Model

~5 min read 5 sections Finance · Stock Valuation

Abstract

This paper calculates and assesses Walmart's cost of equity using the Capital Asset Pricing Model (CAPM), applying a risk-free rate of 0.13%, a market portfolio return of 5%, and Walmart's beta of 0.3 to arrive at a cost of equity of 1.591%. The paper evaluates this result in the context of the average S&P 500 cost of capital, then extends the analysis to competing retailers Target and Sears using their respective betas. It concludes with an overview of the dividend discount model (DDM) as an alternative valuation approach and a brief reflection on the financial assessment tools covered throughout the course.

Key Takeaways

Introduction to CAPM and Required Inputs: CAPM formula, inputs, and Walmart calculation
Interpreting Walmart's Cost of Equity: Why Walmart's 1.591% result is low
Comparing Competitor Cost of Equity: Target and Sears: Target and Sears beta-based equity cost comparison
The Dividend Growth Model as an Alternative Approach: DDM as alternative cost of equity method
Reflection on Financial Assessment Tools: Learning outcomes across financial assessment tools

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What makes this paper effective

The paper methodically walks through each CAPM input before assembling the equation, making the calculation easy to follow step by step.
Competitor comparisons (Target and Sears) add meaningful industry context and highlight how dramatically beta differences affect the cost of equity outcome.
The introduction of the dividend discount model as an alternative approach demonstrates awareness of multiple valuation frameworks without overclaiming their equivalence.

Key academic technique demonstrated

The paper demonstrates applied quantitative reasoning in finance — translating a theoretical model (CAPM) into a concrete calculation and then critically interpreting the result against a real-world benchmark (the S&P 500 average cost of capital). The side-by-side competitor analysis is an effective use of relative benchmarking to validate and contextualize findings.

Structure breakdown

The paper is organized into five short sections: (1) CAPM mechanics and Walmart's calculation, (2) interpretation of the 1.591% result and its relationship to beta and risk, (3) the same CAPM applied to Target and Sears with commentary on differences, (4) a conceptual explanation of the dividend discount model, and (5) a brief reflective conclusion on learning outcomes. The structure is linear and problem-set-style, typical of an undergraduate finance assignment.

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Essay 883 words

Introduction to CAPM and Required Inputs

To calculate the cost of equity using the Capital Asset Pricing Model (CAPM), the equation requires the collection of specific data regarding the firm and the market. The formula is as follows:

Cost of Equity = R_F + β(R_M − R_F)

Here, R_F is the risk-free rate, R_M is the return on a market portfolio, and β (beta) is a measure of volatility or risk.

The first input is the risk-free rate (R_F). The risk-free rate is typically the current rate for government bonds. There is some flexibility in choosing the term, as government bonds are issued over different periods; a commonly used figure is the one-year bond rate. The rate recorded for 20 December 2013 was 0.13% (U.S. Department of Treasury, 2013).

The next input is the return on the market portfolio, which is assumed to be 5%. The final input is beta — a measure of the volatility or risk of a share relative to the broader market. A beta of one means the share's volatility matches that of the stock market; a higher beta indicates greater volatility, while a lower beta indicates less. Walmart's beta is 0.3 (Yahoo Finance, 2013), meaning the share is considerably less volatile than the overall stock market.

With these inputs established, the equation can be assembled:

Risk-free rate = 0.13%
Return on market portfolio = 5%
Beta = 0.3

0.13% + 0.3(5% − 0.13%) = 1.591%

This calculation gives Walmart a cost of equity of 1.591%.

4 Sections Hidden · 480 words

Interpreting Walmart's Cost of Equity130 words

The result of 1.591% may appear lower than expected. The low rate of return is primarily attributable to Walmart's very…

Comparing Competitor Cost of Equity: Target and Sears145 words

When assessing any firm, it is often useful to compare it against similar firms operating in the same industry. For Walmart, relevant comparators include Target and Sears. Target has a…

The Dividend Growth Model as an Alternative Approach110 words

An alternative approach to estimating the cost of equity is the dividend discount model (DDM), also known as the dividend growth model. The underlying assumption of the DDM is that the value of…

Reflection on Financial Assessment Tools95 words

The module has provided the opportunity to learn and practice a number of different financial assessment processes, such as CAPM, APT, and DDM. The value has not only been in learning about the tools…

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References

Beck, C. H. (2013). Fundamentals of Corporate Finance. Prentice Hall.

U.S. Department of the Treasury. (2013). Daily Treasury Yield Curve Rates. Accessed 22 December 2013.

Yahoo Finance. (2013). Sears Holdings. Accessed 22 December 2013.

Yahoo Finance. (2013). Target. Accessed 22 December 2013.

Yahoo Finance. (2013). Walmart. Accessed 22 December 2013.

Key Concepts in This Paper

CAPM Beta Coefficient Risk Premium Cost of Equity Risk-Free Rate Dividend Discount Model Market Portfolio Stock Volatility Retail Sector Benchmarking S&P 500 Average