FINC 300: Walmart Cost of Capital Case Questions

Show all calculations in a clear and organized manner and reference any data used in the calculations. Proof-read your responses to make sure there are no typos, grammatical errors and that your response answers each question in a clear and concise manner. Tables and figures must be properly labeled and formatted in a professional manner.

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1. What is the cost of capital? Why should Dale and Lee care about the cost of capital? (15 pts)
2. Use the two methods discussed in class to estimate Walmarts cost of long-term debt. (Note: the case contains the necessary information for using the ytm method. However, students may need to look up Walmarts current credit rating and applicable credit spread when using the spread method. Use the US Treasury yield curve provided in the case). Which method do you recommend using to calculate WACC and why? (20 pts)
3. Calculate Walmarts cost of equity using the two methods discussed in class. For CAPM, discuss the rationale of using an adjusted vs. raw beta. Which cost of equity method do you recommend using to calculate WACC and why? (30 pts)
4. If Walmart had preferred shares, or planned to issue preferred shares, how would Dale and Lee deal with this additional form of capital? (5 pts)
5. Estimate Walmarts weighted average cost of capital (WACC). State any assumptions and your methodology in a clear and concise manner. (25 pts)
6. How does your response in #5 above relate to hurdle rates that Walmart might use? (10 pts)