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Finance: Weighted average cost of capital.

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You are employed by Wal-Mart Stores, a Fortune 500 firm. You are on the corporate staff as an assistant to the CFO. This is a position with high visibility and the opportunity for rapid advancement, providing you make the right decisions. Your boss has asked you to estimate the weighted average cost of capital for the company. The balance sheet and some other information about Wal-Mart Stores follow below.

(attached is better format)

Assets
Current assets $ 38,000,000
Net plant, property, and equipment 101,000,000
Total assets $139,000,000
Liabilities and equity
Accounts payable $ 10,000,0 00
Accruals 9,000,000
Current liabilities 19,000,000
Long term debt (40,000 bonds, $1,000 par value) 40,000,000
Total liabilities 59,000,000
Common stock (10,000,000 shares) 30,000,000
Retained earnings 50,000,000
Total shareholders equity 80,000,000
Total liabilities and shareholders equity $139,000,000

You check The Wall Street Journal and see that Wal-Mart Stores's stock is currently selling for $6.50 per share and that Wal-Mart Stores's bonds are selling for $875.00 per bond. The bonds have a S1,000 par value, a 7.25% annual coupon rate, semiannual payments, are not callable, and with a 20-year maturity are yielding 8.57%. Wal-Mart Stores 's beta is 1.5 and the yield on a 6-month Treasury bill is 1.75%, while the yield on a 20-year Treasury bond is 3.75%. The expected return on the stock market is 6.50%, but the market has had an average annual return of 9.5% during the past 5 years. Wal-Mart Stores is in the 40% tax bracket.

1. Using the CAPM approach, what is the best estimate of the cost of equity for Wal-Mart Stores?

2. What is the best estimate for the weights to be used when calculating the WACC for Wal-Mart Stores?

3. What is the best estimate of the WACC for Wal-Mart Stores?

4. Today is May 4, 2011 and your boss is also asking you to retrieve the financial statements to find the LTM EBITDA. Which ones should you get and how would you use them? Wal Mart's annual fiscal year ended July 30, 2010 (your answer should include the annual and quarterly statement dates and whether the information should be added or subtracted).

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Solution Summary

The problem deals with estimating the weighted average cost of capital from provided information.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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