Walmart Cost of Capital

1. Title Page (Name of Case, your name, date)
2. Introduction: Summarize why the cost of capital is so important in finance and all other disciplines. Feel free to cite your notes or other articles you have secured throughout this course. (about 1-2 pages). Define the cost of capital
3. Before Tax Cost of Long Term Debt: Walk through how to calculate the cost of debt. As you read the case, last year’s net interest expense is $2,129 million and the total amount of interest-bearing debt is short term borrowings of $5,225 million plus the current portion of long-term debt and capital leases of $2,605 million, plus long-term debt and capital leases of $50,203 million – totalling $58,033 million (see case Exhibit 2). Divide the interest expenses by the total amount of interest – bearing debt to find the before-tax interest cost of debt. (About 1 page)
4. After Tax Cost of Long Term Debt:
   1. Note that the income tax expense for the fiscal year ending 2019 is $4,281 million compared with inocme before taxes of $11,460 million. Now you can calculate the tax rate.
   2. But, what does the case say about corporate tax rates due to declines via U.S. regulations? (About 1 -2 pages)
5. Short Term Borrowing: In Exhibit 2, Walmart has about $5 billion in short term borrowings used to finance operations, make capital expenditures, and fund other cash requirements. Review this and determine if you want to add to the cost of debt to account for this? (About 1 page)
6. Cost of Equity using Gordon: To figure out the cost of equity, use the Gordon dividend growth model (D1 divided by r-g, or r = (D1/Po) + g
   1. Growth can be approximated as the Return on Equity (ROE) x (1- Dividend payout ratio). Please note that ROE is provided in the case)
   2. Dividends in the previous year are presented in the case and it is $2.08 (that is LAST year’s dividend)
   3. The price of Walmart at this time was $102.20 (about 1 page)
7. Cost of Equity using CAPM
   1. The risk-free rate is presented in the case (10 year government bond yield)
   2. The case describes beta and you hae choices so would you like to use the historical “raw” beta or a forward looking beta
   3. The case describes the market risk premium and you have choices. You can take a geometric averge from 1928 – 2018, as an example. (about 1 page)
8. Weights for WACC
   1. If you look at Exhibit 2, you could use the book value wieghts based upon information from the consolidated balance sheet.
   2. You could also use market value weights (about 1 page)
9. What is the WACC that you created (answers may vary). If Target’s WACC is 4.3% and Amazon’s WACC is 8%, how does Walmart compare? (about 1 page) see excel page attached
10. What did you learn from this final exam case about WACC? (about 1 page