Walmart Case

1. What is the cost of capital? Why do Dale and Lee care about the cost of
capital?
2. How should Dale and Lee go about estimating the cost of long-term
debt?
3. If Walmart had preferred shares, or planned to issue preferred shares,
how would Dale and Lee deal with them?
4. How should Dale and Lee deal with deferred taxes?
5. How might Dale and Lee go about estimating the cost of equity?
6. What is the overall weighted average cost of capital?

[(market weight of debt x cost of debt) x (1-tax rate)] + (market weight of equity x cost of equity). The
overall WACC is 8.89%.

WACC is the rate that a company is expected to pay on average to all its security holders to finance its
assets. A company's assets are financed by debt and equity.

WACC = (E/V * Re) + (D/V) * Rd * (1 – Tax Rate)

We make an assumption that the book value of debt is approximately equal to the market value. We
also decided to average the total interest-bearing debt (current portion of long-term debt & capital
leases + long-term debt and capital leases + short-term borrowings) between 2018 and 2019 and use
the result as a proxy for Walmart’s market value of debt. Market value of debt approximately equals the
book value of debt.

7. How does all of this relate to hurdle rates that Walmart might use?

Answer:
When Walmart decides to fund
a plan, the minimum rate it
expects to earn through this
investment is called the hurdle
rate. This allows the investor to
evaluate which plans are
worthwhile and profitable.
When a business is likely to fail
it faces numerous hurdles to
become risky. Therefore, when
a project is riskier the hurdle
rate is higher for.
As Walmart plans their annual
investments for their capital
projects, they will need to
know the hurdle rate to ensure
they earn at least the minimum
rate to ensure it doesn’t
end up in a loss. The investment
might be opening more stores in
a region, remodeling a
store or investing
internationally.
Riskless State + Risk Premium
= Hurdle Rate
Answer:
When Walmart decides to fund
a plan, the minimum rate it
expects to earn through this
investment is called the hurdle
rate. This allows the investor to
evaluate which plans are
worthwhile and profitable.
When a business is likely to fail
it faces numerous hurdles to
become risky. Therefore, when
a project is riskier the hurdle
rate is higher for.
As Walmart plans their annual
investments for their capital
projects, they will need to
know the hurdle rate to ensure
they earn at least the minimum
rate to ensure it doesn’t
end up in a loss. The investment
might be opening more stores in
a region, remodeling a
store or investing
internationally.
Riskless State + Risk Premium
= Hurdle Rate
When Walmart decides to fund a plan, the minimum rate it expects to earn through this investment is
called the hurdle rate. This allows the investor to evaluate which plans are worthwhile and profitable.

It is an opportunity cost of capital, since it depends on available investment opportunities in

financial markets. WACC can be used as a hurdle rate and a benchmark for Walmart in making
decisions regarding new investments.
In that sense, before investing in a new project, Walmart should make sure that the IRR from
the project offers a higher return than WACC of 8.91%. Similarly, WACC can also be used as a
discount rate for future cash flows when calculating net present value (NPV). Whenever NPV is
negative, the project would not get an approval.
One thing to remember, however, is that the true cost of capital depends on project risk, not
on the company undertaking the project. Each project should in principle be evaluated at its
own opportunity cost of capital. WACC would not be the right discount rate for every
investment, but adjustments can be made for more or less risky ventures. Thus, for riskier
projects the hurdle rate would be higher due to risk premium compensation. For safer projects
the hurdle rate would be less.
Appropriate hurdle rate = WACC + Project risk premium
For instance, Walmart’s WACC is 8.91%, and the low-risk premium is 4%. Therefore, the
appropriate hurdle rate would be 8.91% + 4% = 12.91%. Market risk premium of 5%

Предельная ставка - это минимальная норма прибыли, используемая

в качестве стоимости капитала для каждого проекта или инвестиции.
Это альтернативная стоимость капитала, поскольку она зависит от
доступных инвестиционных возможностей на финансовых рынках.
WACC может быть использована в качестве пороговой ставки и
ориентира для Walmart при принятии решений относительно новых
инвестиций.
В этом смысле, прежде чем инвестировать в новый проект, Walmart
должна убедиться, что IRR проекта обеспечивает более высокую
доходность, чем WACC, равный 8,91%. Аналогичным образом, WACC
может также использоваться в качестве ставки дисконтирования
будущих денежных потоков при расчете чистой приведенной
стоимости (NPV). Если NPV будет отрицательным, проект не получит
одобрения.
Однако следует помнить, что истинная стоимость капитала зависит от
риска проекта, а не от компании, осуществляющей проект. Каждый
проект в принципе должен оцениваться по своей собственной
альтернативной стоимости капитала. WACC не является правильной
ставкой дисконтирования для каждой инвестиции, но можно сделать
корректировки для более или менее рискованных предприятий. Так,
для более рискованных проектов ставка hurdle будет выше за счет
компенсации премии за риск. Для более безопасных проектов ставка
hurdle rate будет меньше.
Соответствующая пороговая ставка = WACC + премия за риск проекта
Например, WACC компании Walmart составляет 8,91%, а премия за
низкий риск - 4%. Следовательно, соответствующая пороговая ставка
будет равна 8,91% + 4% = 12,91%. Премия за рыночный риск в
размере 5%