market Price =$103.18

# Shares (mm, or millions) = 2,897

Long term debt ($mm from balance sheet) = $45,396

Tax rate (T) = 25%

Walmart beta () = 0.66

Current risk free rate (rf) = 2.59%

Estimated market risk premium = 6.00%

Estimated underwriter spread = 1.0%

Estimated additional flotation costs = 0.5%

Estimated total flotation cost (as a % of debt face value) = 1.50%

Dividend payout ratio (dividends paid out as a % of net income) 2015 = 38.02% 2016 = 42.89% 2017 = 45.59% 2018 = 62.04% 2019 = 91.68%

Net income ($ millions) 2015 = $16363 2016 = $14694 2017 = $13643 2018 = $9862 2019 = 6670

Common equity $ (millions, book value) 2015 = $85937 2016 = $83611 2017 = $80535 2018 = $80822 2019 = 79634

ROE (net income/common equity or NI/CE) 2015 = 19.04% 2016 = 17.57% 2017 = 16.94% 2018 = 12.20% 2019 = 8.38%

Dividend history ($/share) 2015 = $1.91 2016 = $1.96 2017 = $2.00 2018 = $2.04 2019 = $2.08

Dividend estimates ($/share) 2020 = $2.14 2021 = $2.05 2022 = $2.40 2023 = $2.48

Dividend estimates ($/share)2020 = $2.142021= $2.052022= $2.402023= $2.48

Calculate anddescribe

1)What are the difficulties in estimating the "constant" growth rate for Walmart using the firm's ROE and payout ratio? [g = ROE*(1-payout ratio].discuss of specific input values and issues here.

2)Using the CAPM equation for the required cost of capital, r = rf + (market risk premium), what is the required cost of equity (r_e)?

Proceed with using the estimated CAPM cost of equity.

Calculate the cost of debt

The cost of debt, on a pre-tax basis, is the yield on a firm's bonds. Walmart has at least 50 long-term bonds, the weighted average yield on these bonds is 3.2%. On the other hand, a simplified cost of debt can be calculated as the interest expenses divided by two year average of book value of debt. For Walmart, the book and market value of debt is nearly identical. This estimated cost of debt is 4.49%.

For our purposes, we will take the average, and use 3.85% as the pre-tax cost of debt (preliminary)

Now that we have the average pre-tax cost of debt, we need to account for the underwriter spread. We are simplifying from flotation costs calculated for equity. The adjusted pre-tax cost of debt should be estimated rate (from above)/(1-UW spread). Estimated pre-tax cost after accounting for underwriter spread and other flotation costs (the total of 1.5%). We calculate this adjusted pre-tax cost of debt as: original pre-tax estimate/(1-flotation cost %)

3)What is the adjusted pre-tax cost of debt (r_d)?[show your work below]

4)Weighted average cost of capital

a)Be sure to show your inputs in your WACC above and be sure to adjust for taxes as appropriate.

b)Discuss: Is this weighted average cost of capital a "good" hurdle rate to use for all new Walmart projects?