Chapter 16 Cost of Captal 575 CASE PROBLEM Wal-Mart Cost of Capital Wal-Mart, with $55 billion in sales in 1992, 3 percent in 1993. Based on dividends to is the world's largest retailer.21 It operates date, dividends per share during the year nearly 2,000 Wal-Mart discount stores in 1993 were expected to be $.12. Historical the United States, approximately 200 Sam's dividends per share and earnings per share Clubs membership-warehousc stores, and were as shown at the bottom of this page. a specialty distribution segment that serves Wal-Mart's balance sheet, of January 31, 30,000 convenience stores and independ- 1993, summarizes the company's financial ent grocers. Discount stores' sales ac- structure (Table 16-3). Most of the com counted for 73 percent of 1992 sales. Mem- pany's debt was not actively traded. How bership club sales were the second-largest ever, the company disclosed in a note to area, accounting for 22 percent of 1992 the financial statements that long-term sales. The remaining 5 perceof W debt with a book valuc of $3.073 had a fair Mart's sales were accounted for by McLane market value of $3.357 bllion. Assuming & Western convenience store and inde- the average stated rate on outstanding se- pendent grocer supply division. Thus, Wal- curities was 7.5 percent, the yield to matu- Mart was one of the companies that had re rity would be 6.87 percent. It was assumed sisted the trend toward diversifying into that other long-term debt would sell at a everything from aardvarks to zymometers. similar yield to maturity if the debt were Concentration did not mean lack of publicly sold growth, however. New capital expendi tures in 1992 alone were $3.5 billion, plus cial paper with an average daily balance an associated investment in working capi- outstanding for 1992 of $1.184 billion tal of $1.8 billion. If Wal-Mart was to make The weighted average before tax interest optimal capital investment decisions, it rate on this paper was 3.5 percent. was clear that an accurate estimate of the Wal-Mart has $1.818 billion in capital cost of capital was needed Wal-Mart was a heavy user of commer- lease obligations on the balance sheet. In Wal-Mart presently had 2.3 billion the footnote there is a historical 8 to shares of common stock outstanding. The 14 percent imputed discount rate used in stock had a beta of 1.3 and was selling at calculating this obligation. Given the over- $30 a share in 1992. The yield to maturity al decline in interest rates, the lower end on U.S. Treasury bonds was 6.5 percent, of the range, or 8 percent, is probably the and Treasury bills were selling to yield better estimate of what future leases will 1982 1983 1984 1985 1986 1987 1988 1989 1990 99 992 YEAR Dividends 0.01 Earnings .06 .09 12 15 .2028 37 48 .57.70 87 01 02 02 03 04.06 .07.0911 21This analysis, along with necessary estimates, was prepared by the author and does not represent de views of managers at Wal-Mart