The company chosen for analysis is Walmart, a retail store company. The calculation of the different costs to be used for calculating the Weighted Average Cost of Capital (WACC) were as follows. The values were taken from Walmart’s 2020 annual report.
Cost of Debt
The cost of debt is given by taking a company’s interest expense and dividing it by the debt load.
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Cost of debt = Interest expense/debt load.
The interest expense for Walmart was $2.262 billion. The company’s average debt load was $50 billion.
Cost of debt = $2.262/50*100%
Cost of debt = 4.52%.
Cost of Preferred Stock
Walmart did not have any preferred shares and the cost of preferred stock was thus $0.
Cost of Common Equity
The cost of common equity was calculated by using the capital asset pricing model (CAPM) as follows:
CAPM = Risk free rate + Beta * (Expected market return – risk free rate)
CAPM = 1.51% + 0.45 * (10% – 1.51%)
CAPM = 5.33%
Capital Structure
Walmart’s capital structure had a mix of debt and equity. The company’s capital structure can be identified by evaluating the market capitalizing between the year 2019 and 2020. The table shows the values from the annual report used to calculate the capital structure.
Capital structure = (($575 +$5362 + $43714) + ($5225+$1876+$43520))/2
Capital structure = ($49,651 + $50,621)/2
Capital structure = $50,136
Weighted Average Cost of Capital (WACC)
The WACC is given by:
WACC = weighted cost of equity + weighted cost of debt + weighted cost of preferred
