What does “cost of capital” reflect and why is it important? How is it used by Walmart’s management?
2. Using the information from the case, calculate Walmart’s cost of long-term debt using both the yield-to-maturity and spread
methods. Organize your calculations in a clear and concise manner and state any assumptions. (25 pts)
3. Using the information from the case, calculate Walmart’s cost of equity using i)DDM; and ii) CAPM. Organize your calculations in a clear and concise manner and state any assumptions. (25 pts)
4. Determine Walmart’s WACC. Organize your calculations in a clear and concise manner and state any assumptions. (15 pt)
5. If Walmart had preferred stock or planned to issue preferred
shares, clearly explain how Dale & Lee should incorporate this
additional form of financing into Walmart’s WACC? (No calculations are needed) (10 pts)
The cost of capital is important for several reasons:
It helps companies to evaluate potential investments and determine whether they will generate a return
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It helps companies to determine the optimal capital structure that will minimize their cost of capital.
It helps companies to assess their overall financial health and creditworthiness.
Walmart’s management uses the cost of capital to evaluate potential investments and to determine the best way to finance those investments. For example, if Walmart is considering opening a new store, the cost of capital will help them determine whether the potential return on the investment is sufficient to justify the cost of raising capital to finance the project. Additionally, Walmart’s management uses the cost of capital to evaluate its overall financial health and to determine whether it is meeting the expectations of its shareholders and lenders. By keeping its cost of capital low, Walmart can maintain a competitive advantage and attract new investors.