In March 2019 you and one of your Business Finance classmates were assigned the task of estimating Walmart Inc.s cost of capital (see Exhibits 1 to 5 in the spreadsheet). Walmart needs this information in order for it to assess the merits of a long-term project.

After reviewing all the background material that you were provided, the following issues and ideas come up in your discussion:

• The balance sheet provides information on the two capital sources that Walmart uses to finance its assets. You figure that you need to find the cost of each and then average out that number.
• You start by pondering about the best way to figure out the cost of debt.
  • Your partner (frustratingly) notes that there are many interest rates available. You raise an important point. Walmart appears to have issued $1 billion of long-term bonds 19 years ago with a coupon rate of 7.55%. These bonds mature in 11 years (2030). You also note that these bonds are currently selling for $1,363.8. You are certain that you can somehow use this information to find the cost of debt for Walmart.
  • What about the cost of short-term debt? your friend asks. Well, according to the unbiased expectations theory, the long-term rates are the markets best guess of what average short-term rates will be. With that in mind, you decide that you dont need to make a distinction between the two rates (i.e. consider them to be the same).
• You then turn to possible ways you can estimate the cost of equity.
  • You both recall your professor talking about CAPM and you think that he may have said something about it being a good model to help you figure out the cost of capital. You do a quick Google search for one of its inputs, the stocks beta, and learn that Walmarts beta is 0.71. You go looking for the other inputs, which you put together in a table (see Exhibit 5).
• Sifting through the materials, you come across a statement from Walmart noting that they anticipate their effective tax rate to be 27%.
• You are excited about your groups momentum. Then your partner asks, we need to estimate the weights for the various sources of capital, right?... there are so many items listed under the Liabilities and Equity section of the Balance Sheet, shall we consider all of them?
  • After thinking long and hard, you conclude that the relevant liabilities are the interest-bearing ones (i.e. Long-term debt & Capital Leases, Current Portion of Long-Term Debt, and Short-term borrowing).
  • On the Equity side, you decide that you can ignore all but Retained Earnings and Common Stock and Paid-In Capital.
• It is getting late. One last issue you need to think about and decide on is whether its more reasonable to use book or market values when estimating the weight of debt and equity. You learn that Walmart has 2945 million shares outstanding and that its stock was recently trading for $102.20.

1. What is the cost of capital and why is it important to estimate?

ANSWER:

1. How should you go about estimating the cost of long-term debt? Explain your answer and the relevant calculations.

ANSWER:

1. How should you go about estimating the cost of equity? Explain your answer and the relevant calculations.

ANSWER:

1. What is the overall weighted cost of capital? Explain your answer and the relevant calculations.

ANSWER:

Walmart Inc. Consolidated Income Statement For Year Ending January 31 ($Millions) 2019 514,405 Revenue Costs and Expenses: Cost of Goods Sold Operating, Selling, General, and Administrative Expenses Total Costs and Expenses Operating Income 385,301 107,147 492,448 21,957 Selected Data on Walmart Inc. Common Stock, 2007-2019 2018 Stock Year EPS DPS Price Total Return 500,343 2007 2.71 0.67 36.30 10.07% 2008 3.12 0.88 37.98 7.04% 2009 3.39 0.95 38.36 3.52% 373,396 2010 3.71 1.09 43.04 15.03% 2011 4.47 1.21 106,510 42.33 1.15% 2012 4.52 1.46 49.43 20.22% 479,906 2013 5.02 1.59 60.68 25.97% 20,437 2014 4.88 1.88 65.61 11.23% 2015 5.06 1.92 75.56 18.10% 2016 4.58 1.96 61.39 -16.17% (2,178) 2017 4.39 2.00 67.54 13.28% 2018 3.27 2.04 87.92 (3,136) 33.20% 2019 2.28 2.08 96.08 11.64% 15,123 As at fiscal year end, January 31 Shares outstanding: 2945 million 4,600 EPS = earnings per share 10,523 DPS = dividends per share Total return = (dividend + price change) / previous price (661) / 9.862 Interest Expense, Net Other Items Income Before Income Taxes (2,129) (8,368) 11,460 Income Tax Expense Net Income Net Income Attrributable to Non-Controlling Interests Net Income Attributable to Walmart Shareholders 4,281 7,179 (509) 6,670 2019 2018 Walmart Inc. Consolidated Balance Sheet As of January 31 (SM Nons) ASSETS Current Assets Cash and Equivalents Accounts Receivable Inventory Prepaid Expenses Total Current Assets 32 7.722 6.756 6.283 5614 44209 43.783 3,623 3,511 61.897 904 Average Annual Returns in U.S. Capital Markets Over the Period 1928-2018 24 Net Property Plant, and Equipment Goodwill Other Long-Term Assas Total Assets 111.396 31.181 14 822 212.225 114 818 18.242 11.790 204.522 S&P 500 (Includes Dividends) 3-Month Treasury Bill Return on 10- Year Treasury Bond 1.5 LIABILITIES Current Liables Accounts Payable Accued Liabilities Short-Term Borrowings Current Portion of Long Term Debt & Capital Leases Other Current Liabilities Total Current Liabilities Arithmetic Average 1928-2018 1969-2018 2009-2018 11.36% 11.10% 13.49% 3.43% 4.76% 0.49% 5.10% 7.10% 2.28% 47.000 22.159 5.225 2 606 428 77.477 46,092 22.122 5.257 4 405 4 645 78.521 OB Geometric Average 1928-2018 1969-2018 2009-2018 3.38% Long-Term Debt and Capital Leases Deferred Income Thues and Other Total Liabilities 50 203 36 825 11.981 8,364 138,661 123.700 9.49% 9.73% 12.98% 4.83% 6.69% 1.97% 4.71% 0.49% 0250 ISO 50 DO 10 0 0 0 1 0 0 0 20 0 ODOSDO DO 30 Time - 2/19/2018 EQUITY Common Stock and Paic-In Capital Retained Eamings Other Comprehensive Income (06) Total Common Equity Non-Controlling Interest Total Equity 3.250 2.943 80.785 85.107 (11,542) (10.181) 72.456 77569 7.138 2.963 79.634 80.22 Total Liabilities and Equity 219.795 204.592