please solve case study questions

please answer number 4

Neil Seitz and Mitch Ellison, Capital Budgeting and Long-Term Financing

Decisions, Thomson/South-Western, 4th Edition, 2005.

for Chrysler and CASE PROBLEM ate market val selling for $52 unding and for standing. Please $7.54 billion to efits other than $4.7 billion ob sity by the esti loss on the in ced a large loss in percentage capital to use market for debt and Wal-Mart Cost of Capital with $55 billion in sales in 1902, d's largest retailer. percent in It operates de dienst date, dini o Wal-Mart discount stores in s e during the year Stes, approximately 200 Sam's dividenda per share and earnings per share 1993 were expected to be 5.12. H oc bership warehouse stores, and were as shown at the bottom of this page distribution segment that serves Wal- Man's balance sheet of January 31, convenience stores and independ 1993, summarizes the company's financial pers. Discount stores sales ac structure Table 16.3. Met of the com for 75 percent of 1992 les. Mempam's debt was not actively traded. The L e club sales were the second largest ever, the company disclosed in a note to accounting for 12 percent of 1992 the financial statements that long term The remaining 5 percent of Wal debe with a book of $307 had a fair 'sales were accounted for by McLane market value of $ 57 ball i ng Western convenience store and inde the average stated rate on standing se dent grocer supply division. Thus, Wal- curities was 7.5 percent, the veld tot Vart was one of the companies that had rerity would be 6.7 percent. It was asumed ed the trend toward diversifying into that other long-term debt would sell at a thing from aardvarks to zmometers. similar yield to maturity if the debt were Concentration did not mean lack of publicly sold Wal-Mart was a heavy met of commer prowth, however. New capital expends tures in 1992 alone were $3.5 billion, plus cial paper with an average daily balance outstanding for 1992 of $1.184 billion. ocated investment in working capi- the weighted average before tax interest al of $1.8 billion. If Wal-Mart was to make an "Economic when manage profit is re that you had McDonald's mnformation: AT MARKET 5,646,000,000 751,000,000 706,000,000 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. 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 $50 a share in 1999. The vield to maturity all decline in interest rates, the lower end on US Treasury bonds was 6.5 percent of the range, or 8 percent, is probably the and Treasury bills were selling to wield better estimate of what future leases will 205,000,000 1982 1985 02 15 1981 01 09 1986 02 20 1987 03 20 1988 04 37 1989 06 48 1990 07 57 del, what is 1991 09 70 1992 11 87 01 12 ends 01 06 del, what is rofit? centation of halong with necesarias paredite 576 Part Five Financing Decisions and Required Reum TABLE 16-3 Wal-Mart Balance Sheet Amounts sold are in millions of dollars, and the date of the balance sheet is January 31, 100 SELEC Adler, M Arditi, Deti Current Property, plant, and equipment Other ques TOTAL ASSETS $10.07 9.74 574 120.59 1001 Booth, Way 1999 Booth, $ 3.873 1 58 1233 (SP Brenna 199 13 Brigha LIABILITIES AND EQUITES Current Mobilities Accounts payable Commercial paper Accrued expenses and taxes Long-term debt maturing within 1 year Capital lease obligations due within 1 year Long-term liabilities Long term debt Capital lease obligations Deferred Income taxes Shareholder equity: Common stock Capital in excess of par Reinvested earnings TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Brown 3,073 1772 of Conin 230 527 8.003 Cons $20.565 Dang cost. Details of the long-term capitalized lease obligations and additional operating lease obligations are as follows: Dian ket value of these lease obligations is as sumed to be 8 percent. There were no shares of preferred stock outstanding. Wal-Mart had a 37 percent combined federal and state marginal tax rate in 1992 LEASE PAYMENTS DUE IN S MILLIONS $ 486 476 YEAR 1993 1994 1995 1996 1997 Thereafter 470 475 464 5,316 Case Questions 1. Estimate the market value of each component of the capital structure. 2. Estimate the required return for each component of the capital structure. 3. Estimate the weighted average cost of capital for Wal-Mart. 4. In which area of your analysis is balsis is there the greatest potential for error is there anything that could be to improve estimates in this area? The "thereafter" amount is assumed to be due at $143 million per year for the next 12 years from 1998 to 2009. The market rate of interest to be used to find the mar 576 Part Five Financing Decisions and Required Reum TABLE 16-3 Wal-Mart Balance Sheet Amounts soledare in millions of dollars, and the date of the balance sheet is January 31, 100 SELEC Adler, M ASSETS Arditi, Defit Current ou Property, plant, and equipment Other aus TOTAL ASSETS $10,197 9,794 574 1001 Booth, $20.56 Way 1994 Booth, $ 3.873 1 58 1233 (SP Brenna 198 1 Brigha LIABUITIES AND EQUITES Current Mobilities Accounts payable Commercial paper Accrued expenses and taxes Long-term debt maturing within 1 year Capital lease obligations due within 1 year Long-term liabilities Long term debe Capital lease obligations Deferred Income taxes Shareholder equity: Common stock Capital in excess of par Reinvested earnings TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Brown 3,073 1772 207 of Conin 230 527 Cons 8.003 $20.565 Dang cost. Details of the long-term capitalized lease obligations and additional operating lease obligations are as follows: Dian ket value of these lease obligations is as sumed to be 8 percent. There were no shares of preferred stock outstanding. Wal-Mart had a 37 percent combined federal and state marginal tax rate in 1992 LEASE PAYMENTS DUE IN S MLIONS $ 486 476 YEAR 1993 1994 1995 1996 1997 Thereafter 470 475 464 5,316 Case Questions 1. Estimate the market value of each component of the capital structure. 2. Estimate the required return for each component of the capital structure. 3. Estimate the weighted average cost of capital for Wal-Mart. 4. In which area of your analysis is balsis is there the greatest potential for error? Why? is there anything that could be to improve estimates in this area? The "thereafter" amount is assumed to be due at $143 million per year for the next 12 years from 1998 to 2009. The market rate of interest to be used to find the mar Chapter 16 Cast of Capital 575 CASE PROBLEM Wal-Mart, with $55 is the world's la nearly 2,000 wai the United States, Clubs membershin a specialty distribe 3 percent in 1993. Based on dividends to date, dividends per share during the year 1993 were expected to be $.12. Historical 50,000 conveniences ent grocers. Di bership club sales were the Wal-Mart Cost of Capital with $55 billion in sales in 1992, d's largest retailer. It operates 000 Wal-Mart discount stores in States, approximately 200 Sam's mbership warehouse stores, and were as shown at the bottom of this page dividends per share and earnings per share fry distribution segment that serves Wal-Mart's balance sheet, of January 31. convenience stores and independ- 1993, summarizes the company's financial cocers. Discount stores sales ac structure (Table 16-3). Most of the com- ed for 73 percent of 1992 sales. Mem- pany's debt was not actively traded. How in club sales were the second-largest ever, the company disclosed in a note to accounting for 22 percent of 1992 the financial statements that long-term cles. The remaining 5 percent of Wal- debt with a book value of $3.073 had a fair Mart's sales were accounted for by McLane market value of $5.357 billion. 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 vield to matu Vart was one of the companies that had rerity 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 vield to maturity if the debt were Concentration did not mean lack of publicly sold. growth, however. New capital expendi- Wal-Mart was a heavy user of commer. 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. The weighted average before tax interest tal of $1.8 billion. If Wal-Mart was to make rate on this paper was 3.5 percent. optimal capital investment decisions, it Wal-Mart has $1.818 billion in capital was clear that an accurate estimate of the lease obligations on the balance sheet. In cost of capital was needed. Wal-Mart presently had 2.3 billion shares of common stock outstanding. The stock had a beta of 1.3 and was selling at $30 a share in 1992. The vield to maturity on U.S. Treasury bonds was 6.5 percent and Treasury bills were selling to vield the footnote there is a historical 8 to 14 percent imputed discount rate used in calculating this obligation. Given the over all decline in interest rates, the lower end of the range, or 8 percent, is probably the better estimate of what future leases will YEAR 1982 190 1982 .01 06 1983 .01 09 1984 .01 12 1985 .02 15 1986 .02 20 1987 .03 28 1988 .04 37 1989 .06 48 1990 07 57 1991 09 70 1992 11 87 nds Earnings 06 This analysis, along Mart ng with necessary estimates was prepared by the author and does not represent the views of manager at for Chrysler and CASE PROBLEM ate market val selling for $52 unding and for standing. Please $7.54 billion to efits other than $4.7 billion ob sity by the esti loss on the in ced a large loss in percentage capital to use market for debt and Wal-Mart Cost of Capital with $55 billion in sales in 1902, d's largest retailer. percent in It operates de dienst date, dini o Wal-Mart discount stores in s e during the year Stes, approximately 200 Sam's dividenda per share and earnings per share 1993 were expected to be 5.12. H oc bership warehouse stores, and were as shown at the bottom of this page distribution segment that serves Wal- Man's balance sheet of January 31, convenience stores and independ 1993, summarizes the company's financial pers. Discount stores sales ac structure Table 16.3. Met of the com for 75 percent of 1992 les. Mempam's debt was not actively traded. The L e club sales were the second largest ever, the company disclosed in a note to accounting for 12 percent of 1992 the financial statements that long term The remaining 5 percent of Wal debe with a book of $307 had a fair 'sales were accounted for by McLane market value of $ 57 ball i ng Western convenience store and inde the average stated rate on standing se dent grocer supply division. Thus, Wal- curities was 7.5 percent, the veld tot Vart was one of the companies that had rerity would be 6.7 percent. It was asumed ed the trend toward diversifying into that other long-term debt would sell at a thing from aardvarks to zmometers. similar yield to maturity if the debt were Concentration did not mean lack of publicly sold Wal-Mart was a heavy met of commer prowth, however. New capital expends tures in 1992 alone were $3.5 billion, plus cial paper with an average daily balance outstanding for 1992 of $1.184 billion. ocated investment in working capi- the weighted average before tax interest al of $1.8 billion. If Wal-Mart was to make an "Economic when manage profit is re that you had McDonald's mnformation: AT MARKET 5,646,000,000 751,000,000 706,000,000 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. 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 $50 a share in 1999. The vield to maturity all decline in interest rates, the lower end on US Treasury bonds was 6.5 percent of the range, or 8 percent, is probably the and Treasury bills were selling to wield better estimate of what future leases will 205,000,000 1982 1985 02 15 1981 01 09 1986 02 20 1987 03 20 1988 04 37 1989 06 48 1990 07 57 del, what is 1991 09 70 1992 11 87 01 12 ends 01 06 del, what is rofit? centation of halong with necesarias paredite 576 Part Five Financing Decisions and Required Reum TABLE 16-3 Wal-Mart Balance Sheet Amounts sold are in millions of dollars, and the date of the balance sheet is January 31, 100 SELEC Adler, M Arditi, Deti Current Property, plant, and equipment Other ques TOTAL ASSETS $10.07 9.74 574 120.59 1001 Booth, Way 1999 Booth, $ 3.873 1 58 1233 (SP Brenna 199 13 Brigha LIABILITIES AND EQUITES Current Mobilities Accounts payable Commercial paper Accrued expenses and taxes Long-term debt maturing within 1 year Capital lease obligations due within 1 year Long-term liabilities Long term debt Capital lease obligations Deferred Income taxes Shareholder equity: Common stock Capital in excess of par Reinvested earnings TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Brown 3,073 1772 of Conin 230 527 8.003 Cons $20.565 Dang cost. Details of the long-term capitalized lease obligations and additional operating lease obligations are as follows: Dian ket value of these lease obligations is as sumed to be 8 percent. There were no shares of preferred stock outstanding. Wal-Mart had a 37 percent combined federal and state marginal tax rate in 1992 LEASE PAYMENTS DUE IN S MILLIONS $ 486 476 YEAR 1993 1994 1995 1996 1997 Thereafter 470 475 464 5,316 Case Questions 1. Estimate the market value of each component of the capital structure. 2. Estimate the required return for each component of the capital structure. 3. Estimate the weighted average cost of capital for Wal-Mart. 4. In which area of your analysis is balsis is there the greatest potential for error is there anything that could be to improve estimates in this area? The "thereafter" amount is assumed to be due at $143 million per year for the next 12 years from 1998 to 2009. The market rate of interest to be used to find the mar 576 Part Five Financing Decisions and Required Reum TABLE 16-3 Wal-Mart Balance Sheet Amounts soledare in millions of dollars, and the date of the balance sheet is January 31, 100 SELEC Adler, M ASSETS Arditi, Defit Current ou Property, plant, and equipment Other aus TOTAL ASSETS $10,197 9,794 574 1001 Booth, $20.56 Way 1994 Booth, $ 3.873 1 58 1233 (SP Brenna 198 1 Brigha LIABUITIES AND EQUITES Current Mobilities Accounts payable Commercial paper Accrued expenses and taxes Long-term debt maturing within 1 year Capital lease obligations due within 1 year Long-term liabilities Long term debe Capital lease obligations Deferred Income taxes Shareholder equity: Common stock Capital in excess of par Reinvested earnings TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Brown 3,073 1772 207 of Conin 230 527 Cons 8.003 $20.565 Dang cost. Details of the long-term capitalized lease obligations and additional operating lease obligations are as follows: Dian ket value of these lease obligations is as sumed to be 8 percent. There were no shares of preferred stock outstanding. Wal-Mart had a 37 percent combined federal and state marginal tax rate in 1992 LEASE PAYMENTS DUE IN S MLIONS $ 486 476 YEAR 1993 1994 1995 1996 1997 Thereafter 470 475 464 5,316 Case Questions 1. Estimate the market value of each component of the capital structure. 2. Estimate the required return for each component of the capital structure. 3. Estimate the weighted average cost of capital for Wal-Mart. 4. In which area of your analysis is balsis is there the greatest potential for error? Why? is there anything that could be to improve estimates in this area? The "thereafter" amount is assumed to be due at $143 million per year for the next 12 years from 1998 to 2009. The market rate of interest to be used to find the mar Chapter 16 Cast of Capital 575 CASE PROBLEM Wal-Mart, with $55 is the world's la nearly 2,000 wai the United States, Clubs membershin a specialty distribe 3 percent in 1993. Based on dividends to date, dividends per share during the year 1993 were expected to be $.12. Historical 50,000 conveniences ent grocers. Di bership club sales were the Wal-Mart Cost of Capital with $55 billion in sales in 1992, d's largest retailer. It operates 000 Wal-Mart discount stores in States, approximately 200 Sam's mbership warehouse stores, and were as shown at the bottom of this page dividends per share and earnings per share fry distribution segment that serves Wal-Mart's balance sheet, of January 31. convenience stores and independ- 1993, summarizes the company's financial cocers. Discount stores sales ac structure (Table 16-3). Most of the com- ed for 73 percent of 1992 sales. Mem- pany's debt was not actively traded. How in club sales were the second-largest ever, the company disclosed in a note to accounting for 22 percent of 1992 the financial statements that long-term cles. The remaining 5 percent of Wal- debt with a book value of $3.073 had a fair Mart's sales were accounted for by McLane market value of $5.357 billion. 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 vield to matu Vart was one of the companies that had rerity 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 vield to maturity if the debt were Concentration did not mean lack of publicly sold. growth, however. New capital expendi- Wal-Mart was a heavy user of commer. 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. The weighted average before tax interest tal of $1.8 billion. If Wal-Mart was to make rate on this paper was 3.5 percent. optimal capital investment decisions, it Wal-Mart has $1.818 billion in capital was clear that an accurate estimate of the lease obligations on the balance sheet. In cost of capital was needed. Wal-Mart presently had 2.3 billion shares of common stock outstanding. The stock had a beta of 1.3 and was selling at $30 a share in 1992. The vield to maturity on U.S. Treasury bonds was 6.5 percent and Treasury bills were selling to vield the footnote there is a historical 8 to 14 percent imputed discount rate used in calculating this obligation. Given the over all decline in interest rates, the lower end of the range, or 8 percent, is probably the better estimate of what future leases will YEAR 1982 190 1982 .01 06 1983 .01 09 1984 .01 12 1985 .02 15 1986 .02 20 1987 .03 28 1988 .04 37 1989 .06 48 1990 07 57 1991 09 70 1992 11 87 nds Earnings 06 This analysis, along Mart ng with necessary estimates was prepared by the author and does not represent the views of manager at