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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
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)*
*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 NPV of new supercenter indicates a positive accounting profit from the investment.
B )Estimated operating margin of new discount store indicates a positive economic profit from the investment.
C)Estimated operating margin of new supercenter indicates a positive economic profit from the investment.
D) Estimated NPV of new discount store indicates a positive accounting profit from the investment.
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