You are advising WALMART Inc. (WALMART), a leading US retail company, on how to estimate its...
Fantastic news! We've Found the answer you've been seeking!
Question:
![You are advising WALMART Inc. (WALMART), a leading US retail company, on how to estimate its cost of capital](https://dsd5zvtm8ll6.cloudfront.net/questions/2024/01/659bd7466bd07_1704758801102.jpg)
![Online $5.0 billion Firm Beta D/E Tax rate 25% 3.5% Additionally, you have identified two pure-play firms:](https://dsd5zvtm8ll6.cloudfront.net/questions/2024/01/659bd74bc097b_1704758806470.jpg)
Transcribed Image Text:
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 market 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 B&M $10.0 billion Debt-to-equity ratio 40% Before-tax cost of debt 3.5% Tax rate 40% Online $5.0 billion Firm Beta D/E Tax rate 25% 3.5% 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. Stores Inc. 1 30% 25% 40% E-Trade Inc. 2.5 20% 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. (14 marks) 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. (14 marks) 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. (4 marks) 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 market 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 B&M $10.0 billion Debt-to-equity ratio 40% Before-tax cost of debt 3.5% Tax rate 40% Online $5.0 billion Firm Beta D/E Tax rate 25% 3.5% 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. Stores Inc. 1 30% 25% 40% E-Trade Inc. 2.5 20% 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. (14 marks) 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. (14 marks) 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. (4 marks)
Expert Answer:
Answer rating: 100% (QA)
You are asked to determine the Weighted Average Cost of Capital WACC for different divisions of WALMART Inc and how using an inappropriate WACC can affect project evaluation Ill take you through a ste... View the full answer
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Posted Date:
Students also viewed these finance questions
-
The beam shown in the figure has a guided support at A and a roller support at B. The guided support permits vertical movement but no rotation. Derive the equation of the deflection curve and...
-
Use Theorem 2 to calculate g'(x), where g is the inverse of . THEOREM 2 Derivative of the Inverse Assume that f is differentiable and one-to- one with inverse g(x) = f(x). If b belongs to the domain...
-
Problem 1 - Payback methods, even and uneven cash flows. Sage Laundromat is trying to enhance the services it provides to customers, mostly college students. It is looking into the purchase of new...
-
In Exercises 8586, find a. (f g)(x); b. (g f)(x); c. (f g)(3). f(x) = x 2 + 3, g(x) = 4x - 1
-
This year, Hassell Company will ship 4,000,000 pounds of chocolates to customers with total order filling costs of $900,000. There are two types of customers: those who order 50,000 pound lots (small...
-
Write the SQL command to revoke user Stetsons privilege.
-
E1-6 [Appendix] Journal entries to record business combinations Pop Company issued 120,000 shares of $10 par common stock with a fair value of $2,550,000 for all the voting common stock of Son...
-
Finding the WACC Titan Mining Corporation has 8.5 million shares of common stock outstanding, 200,000 shares of 7 percent preferred stock outstanding and 85,000 8.5 percent semiannual bonds...
-
17. the future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is A. $39,310. B. $20,000. C. $35,098. D. $11,300.
-
A dog training business began on December 1. The following transactions occurred during its first month. December 1 Receives $23,000 cash as an owner investment in exchange for common stock. December...
-
Transcribed image text: Required information [The following information applies to the questions displayed below.] The following information is available for ADT Company, which produces special-order...
-
1. Write short notes on Discrete Cosine Transform (DCT) 2. Describe Fast Fourier Transform 3. Write short notes on the Hotelling transform
-
1Explain Discrete Fourier Transform in detail. 2. Explain the Properties of 2D discrete Fourier Transform 3. Discuss Hadamard's transformation in detail
-
1. Specify the objective of image enhancement technique. 2. List the 2 categories of image enhancement. 3. What is the purpose of image averaging? 4. What is meant by masking? 5. Define histogram.
-
6. What is meant by histogram equalization? 7. Differentiate linear spatial filter and non-linear spatial filter. 8. Give the mask used for high boost filtering. 9. What is meant by a laplacian...
-
11. What do you mean by Point processing? 12. Define Derivative filter? 13. Define spatial filtering 14. What is a Median filter? 15. What is maximum filter and minimum filter? 16. Write the...
-
Please note for transaction m that the bad debt expense needs to be calculated The following data were selected from the records of Tunga Company for the year ended December 31, 2021: Balances at...
-
Which task is performed by a book-keeper? A. Analysing the trading results B. Entering transactions in the ledger C. Preparing year-end financial statements D. Providing information for...
-
Vulcan Materials Company, a member of the S&P 500 Index, is the nations largest producer of construction aggregates, a major producer of asphalt mix and concrete, and a leading producer of cement in...
-
Douglas C. Mather, founder, chair, and chief executive of Fly-by-Night International Group (FBN), lived the fast-paced, risk-seeking life that he tried to inject into his company. Flying the companys...
-
SunTrust Banks owns a large block of Coca-Cola Company (Coke) common stock that it has held for many years. SunTrust indicates in a note to its financial statements that all equity securities held by...
-
Why does a company need a general journal when using special journals for sales, purchases, cash receipts, and cash disbursements? AppendixLO1
-
Compute segment return on assets and use it to evaluate segment performance. AppendixLO1
-
How are data in the information storage component of an accounting system used? AppendixLO1
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App