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What is the worst interpretation and why? What is the worst interpretation on exhibit 7 of Walmart case below? Focus on the heighted statistics of
What is the worst interpretation and why?
What is the worst interpretation on exhibit 7 of Walmart case below? Focus on the heighted statistics of discount store, supercenter, and weighted average cost of capital. Exhibit 7 Estimated NPV per New Store ($ million)* Long-Run Operating Margin** Weighted Average Discount Supercenter Cost of Capital Store 10% 7% 8% 9% 7% $19.7 $19.2 $23.7 $28.2 8% $17.7 $16.8 $21.0 $25.1 8.8%*** $16.3 $15.0 $19.0 $22.9 9% $15.9 $14.6 $18.5 $22.4 10% $14.3 $12.6 $16.2 $19.8 11% $12.8 $10.8 $14.1 $17.5 Source: Casewriter's estimates. *Discount Store assumed to generate long-run sales of $39 million per year with an initial investment of $10.6 million and Supercenter assumed to generate long-run sales of $75 million per year with an initial investment of $15.5 million. NPVs are net of these initial investments. *Operating margin assumed to ramp up to its long-run level in five years. *Wal-Mart's estimated cost of capital equaled 8.8% given the following: - a cost of equity of 9.25% (based on a 10-yr US Treasury rate of 4% (the risk- free rate), a market risk premium of 5%, and a beta of 1.05.); - a cost of debt of 4.88% as reported by Goldman Sachs; a market value of equity of $210,987 million; a book value of debt of $16.6 billion; and a tax rate of 35.0%. (a) Estimated operating margin of new discount store indicates a positive economic profit from the investment. (b) Estimated operating margin of new supercenter indicates a positive economic profit from the investment. (c) Estimated NPV of new discount store indicates a positive accounting profit from the investment. d) Estimated NPV of new supercenter indicates a positive accounting profit from the InvestmentStep by Step Solution
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