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Weighted Average Cost of Capital

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Weighted Average Cost of Capital (WACC)

(WACC) refers to a financial ratio that computes an organization’s cost of funding and

sourcing assets by equating the organization’s equity and debt structures. This ratio measures the

debt degree and the real cost of acquiring cash or finances via equity to fund additional capital

operations and enlargements according to the organization’s existing equity and debt structures

CFI. (2022). Companies use this ratio to determine if they should use debt or equity to fund new

purchases. The ratio is very complex since it averages all sources of capital such as bonds,

common stock, long-term debt, and preferred stock to determine the average cost of borrowing

funds.

My WACC Calculations

Walmart

WACC= E/(E+D) x cost of equity + D/ (E+D) x cost of debt x (1-Tax Rate)

Weights

Equity and debt finance Walmart’s assets. The computation of the weights is as follows:

Walmart’s Market capitalization (E) = $343740.216 mil.

Book value of debt = $60284.5 mil.

Weight of equity= E/(E+D) = 343740.216/ (343740.216 + 60284.5) = 0.8508

Debt= D/(E+D) = 60284.5/ (60284. 5+ 343740.216) = 0.1492

Cost of Equity= Risk Free Rate of Return + Beta of Asset x (Expected market return-Risk free

rate of return)

=3.08 +0.46 x 6

=5.84%

Cost Debt= 1994/60284.5= 3.3076%

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Average tax rate= 29.395%

WACC= 0.8508x 5.84 + 0.1492x 3.3076 x (1-29-395) = 5.32 %

Target

Weight of Equity= 68622.432/ (15788+68622) = 0.813

Debt= 15788/ (68622.432+15788) = 0.187

Cost of equity= 3.08 +1.07 x 6%= 9.5%

Cost of Debt= 421/15788= 2.666%

Average Tax Rate= 21.63%

WACC= 0.813x 9.5% + 0.187x2.6665x (1-21.63%)

= 8.11%

Differences with other WACC Estimates

The estimates differ in the computation of weights, cost of equity and debt, and the

average tax rates. The difference in the cost of equity results from variance in the beta factor and

the risk-free rate of return. Most of the websites have used a higher risk-free rate while

computing the cost of equity. For example, some have used a risk-free rate between 3 and 3.5

percent. The cost of debt also differs since the websites the debt averages of past years. My

computation and the websites occurred at different times. For example, most websites have

computed the WACC for the two organizations or the years 2020 and 2021. My computation has

used the current figures leading to different averages. The average cost of debt in two websites

ranges between 4.5 and 5 % in the case of Target organization (Finbox). In the case of Walmart,

it ranges between 4.0 and 4.7 percent compared to 3.3076 percent.

Furthermore, the average tax rate also differs, but the one used in my computation falls

within the range of the three websites. In the case of Walmart, the average tax rate used ranges
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between 29.2 and 32.4%. This shows a slight difference from 29.395% used since it falls within

the range. Similarly, the difference in the tax rate for Target also differs slightly. The average on

the websites is 21% while I used 21.63 percent to compute the WACC (Value Investing).

Therefore, the major differences between the estimates result from the use of data from different

financial periods. It also occurs based on the varied formulas professionals use to compute the

cost of debt and equity.

The Average Computation of WACC

Walmart’s WACC= 5.32%

Target’s WACC= 8.11%

The average WACC= (5.32+ 8.11)/2= 6.715%

Based on the above average, Walmart’s WACC is the lowest in the range while Target’s

WACC is the highest in the range. 6.715% is the mid-WACC for the two companies.
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References

CFI. (2022). WACC.

https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-wacc-

formula/

Finbox. Target Corporation.

https://finbox.com/NYSE:TGT/models/wacc

Finbox. Walmart

https://finbox.com/NYSE:WMT/explorer/wacc

Value Investing. Target Corporation.

https://valueinvesting.io/TGT/valuation/wacc

Value Investing. Walmart.

https://valueinvesting.io/WMT/valuation/wacc