You are advising WALMART Inc. (WALMART), a leading US retail company, on

how to estimate its cost of capital at the divisional level. You have collected the

following information:

The risk-free rate is 2.5%.

The equity risk premium is 5%.

You have broken down WALMART into two business groups, with

revenues, debt-to-equity ratio, before-tax cost of debt, and tax rate for

each group.

Business group	Revenues	Debt-to-equity	Before-tax cost of Debt	Tax rate
B&M	$10.0 billion	40%	3.5%	40%
Online	$5.0 billion	25%	3.5%	40%

Additionally, you have identified two pure-play firms:

Stores Inc. (which owns a large number of physical retail stores in the U.S.) and E-Trade Inc. (which specializes in selling goods online). Stores Inc. is a direct competitor of the B&M division of WALMART, whereas E-Trade Inc. competes with the Online division of WALMART. You have collected the following information about the two pure-play firms.

Firm Stores Inc. E-Trade Inc.

Beta 1 2.5

D/E 30% 20%

Tax rate 25% 20%

a) WALMART is considering to open a few more stores to be located across

different states in the U.S.. Determine the appropriate discount rate (WACC)

WALMART should use for evaluating this project.

b) WALMART is considering to expand its existing online operations by building

a new online platform that would make it easier for customers to shop online.

Determine the appropriate discount rate (WACC) WALMART should use for

evaluating this project.

c) What would happen if WALMART uses the WACC of its B&M division to

evaluate its online project? Briefly explain how this will affect the NPV analysis

and the acceptance/rejection decision for the new online project. No

calculations are required.