Estimating Walmart's Cost of Capital

Description

In March 2019, two senior managers attending an executive education program had been assigned the task of applying their learnings from readings in order to estimate the costs of capital for Walmart Inc. (Walmart). They also needed to discuss why the cost of capital was such an important topic. The managers had with them background information, including a recent Walmart balance sheet and income statement; a U.S. Department of Treasury yield curve; Walmart’s earnings, dividend, and stock price information; historical U.S. capital market returns; interest rates; and a detailed description of a long-term Walmart bond. Based on this information, the managers needed to estimate Walmart’s cost of capital and be sure they understood why this mattered.

Learning Objective

This case has been designed for use in finance courses at both the undergraduate and graduate levels to discuss cost of capital. It can be placed in a section on capital investments and projects or near the beginning of a section on valuation. The case may be preceded by a 30- to 45-minute lecture or discussion on cost of capital theory. The case focuses on estimation of the cost of capital—a fairly straightforward concept that can be much more difficult to apply in practice. Following the discussion, students will have developed their ability to do the following: ·Explain why the cost of capital is an important topic. ·Estimate the cost of various sources of financing. ·Explain the importance of the yield curve. ·Explain how bonds are priced. ·Explain the nature and estimation of risk premiums. ·Explain the importance of the capital asset pricing model. ·Determine how to weight various costs of financing. ·Relate the cost of capital to hurdle rates.

Keywords

Bond valuation Capital structure cost of capital Hurdle rate risk premium Yield curve