You are advising WALMART Inc. (WALMART), a leading US retail company, on how to estimate its...

 

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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)

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