Walmart Case
Cost of Capital
Debt
Equity
Other
100
This analyst would win in a fist fight
Lee
100
The definition of capital
Cash or liquid assets being held or obtained for expenditures
100
The definition of debt
Money owed
100
The definition of equity
Ownership of assets
100
Definition of interest
the amount of money a lender or financial institution receives for lending out money
200
World's largest supermarket of consumer goods
Walmart
200
The difference between hurdle rate and WACC
Hurdle rate is the minimum required return for a project, while WACC represents the cost of capital for the firm. Generally the WACC is used as a benchmark for setting the hurdle rate needed to offset the costs and yield positive NPV.
200
A way to calculate cost of debt
YTM, Bond Spread, or Book Debt
200
One way to calculate cost of equity
CAPM or DDM
200
Scenario where using DDM to estimate cost of equity is appropriate
DDM is suitable for more established and mature companies that have stable dividend payouts
300
The formula for WACC
(We x Ke) + (Wd * Kd * (1-t))
300
Should BV or MV "debt/equity value" be used in Walmart's case?
Market value
300
One reason why short term yields are usually lower than long term yields
1. Investors demand higher compensation for greater risk over a longer time horizon
2. Inflationary risk
300
Two reasons why debt is cheaper than equity
1. Debt holders are paid back before equity holders
2. Interest expenses are tax-deductible
300
Walmart's tax rate to be used when calculating WACC
27%
400
Walmart's weight of equity
85%
400
The relevancy of pecking order theory
Pecking order is important since it signals to the public how the company is performing
Walmart can implement pecking order, since they are financially healthy and have available internally generated funds
400
The best way to estimate cost of debt
Yield to maturity approach is best since it is based on market expectations
400
Market value of Walmart's equity
301 billion
400
Impact of deferred income taxes
Deferred income taxes may exist from tax vs book differences, but will not be included in WACC calculation. Not treated as a source of financing.
500
A reason why Walmart may need to calculate more than one cost of capital
Walmart has different divisions, including their online segment, US vs international, and private label arm. Each division will carry different levels of risk, and the overall firm risk represents the average risk.
500
Impact of preferred shares on cost of capital
issuing preferred stock may increase or decrease a company’s WACC in the short term
500
Method of calculating cost of debt if Walmart had no debt
Comparables analysis or credit spread
500
Difference between arithmetic and geometric returns for calculating MRP
Geometric accounts for compounding and accounts for positive/negative changes
500
Reason why Walmart's reported tax rate would be higher than 21%
Local, state, and international taxes