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 %)

5)What is the adjusted pre-tax cost of debt (r_d)?[show your work below]For the cost of debt, adjust for thefull 1.5%in underwriter spread and other flotation costs, both of these are a part of the total flotation costs.

6)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?