WACC is calculated using the following formula:
WACC = (E/E+D) rE + D/(E+D) rD (1-TC)
Where,
E is the market value of the equity of the firm
rE is the cost of equity
rD is the cost of debt
D is the market value of the debt of the firm
TC if the corporate tax rate
E+D if the total market value of financing, of the firm, that is debt and equity
The data for the calculation of WACC for Target Corporation was obtained from Yahoo Finance. This source contains the financial statements of the firm and other financial summaries of the company. The important information was obtained from the income statement and balance sheet. The information extracted from the income statement is shown in Table 1.
Table 1
Target Corporation income statement
| Income Statement ('000s) |
02-02-19 |
| Total Revenue |
$ 75,356,000 |
| Cost of Revenue |
$ 53,299,000 |
| Gross Profit |
$ 22,057,000 |
| Total Operating Expenses |
$ 71,129,000 |
| Operating Income or Loss |
$ 4,227,000 |
| Income Before Tax |
$ 3,676,000 |
| Income Tax Expense |
$ 746,000 |
| Net Income |
$ 2,937,000 |
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Source: Yahoo Finance
Table 2 shows the firm’s balance sheet information.
Table 2
Target Corporation balance sheet
| Balance Sheet ('000s) |
02-02-19 |
| Total Current Assets |
$ 12,519,000 |
| Total Non-Current Assets |
$ 28,771,000 |
| Total Assets |
$ 41,290,000 |
| Total Current Liabilities |
$ 15,014,000 |
| Total Non-Current Liabilities |
$ 14,979,000 |
| Total Liabilities |
$ 29,993,000 |
| Common Stock |
$ 43,000 |
| Retained Earnings |
$ 6,017,000 |
| Total stockholders' equity |
$ 11,297,000 |
| Total Debt and Equity |
$ 41,290,000 |
Source: Yahoo Finance
Using Yahoo Finance, the following summary information about the company was also obtained:
Table 3
Target Corporation financial summary
| Previous Close | 82.62 |
| Open | 82.53 |
| Bid | 81.51 x 1200 |
| Ask | 81.92 x 800 |
| Day's Range | 81.45 - 82.73 |
| 52 Week Range | 60.15 - 90.39 |
| Volume | 5,081,616 |
| Avg. Volume | 5,005,040 |
| Market Cap | 41.765B |
| Beta (3Y Monthly) | 0.84 |
| PE Ratio (TTM) | 14.26 |
| EPS (TTM) | 5.72 |
| Earnings Date | Aug 21, 2019 |
| Forward Dividend & Yield | 2.64 (3.20%) |
| Ex-Dividend Date | 2019-08-20 |
| 1y Target Est | 88.83 |
Source: Yahoo Finance
The β for the company is 0.84, and the market capitalization is 41.765 billion. From the data in the tables above, the appropriate values were calculated and obtained, as shown in the tables below:
Table 4
Financial ratios
|
Formula |
Ratios |
| Net Income/Equity |
26.00% |
| Net Income/Debt (Cost of Debt) |
9.79% |
| Tax/NIBT (Marginal tax rate) |
20.29% |
| Debt/(Debt+Equity) |
72.64% |
| Equity/(Debt+Equity) |
27.36% |
Table 5
Beta, risk and return rates
| Beta |
0.84 |
| Risk-free rate |
3.500% |
| Market return |
5.000% |
| Required return on equity (CAPM) |
7.700% |
| Required rate of return on debt |
9.792% |
Using this information, the following values were obtained:
E/(E+D) =0.2736
rE=0.077
D/(E+D) =0.7264
rD=0.098
TC=0.4
Therefore,
WACC= (0.2736*0.077)+(( 0.7264*0.098)*(1-0.4))
=6.375%
Discussion
From Target Corporation financial reports, the firm’s WACC is 6.15% as of today. This value is slightly less than the calculated value above. Therefore, the confidence in the calculated WACC is significantly high since the result is close to the actual value. The limitation of the assumptions of 3.5% risk-free rate was that the actual value is possibly different, and it results in a slightly higher value of WACC from the actual one.
References
Schawel, C., & Billing, F. (2014). WACC. Top 100 Management Tools , 270-272. doi:10.1007/978-3-8349-4691-1_90
Target Corporation. (2018). Financial Summary: Target 2018 Annual Report | Target Corporate. Retrieved from https://corporate.target.com/annual-reports/2018/financials/financial-summary
Yahoo Finance. (2019). Target Corporation (TGT) Stock Price, Quote, History & News. Retrieved August 4, 2019, from https://finance.yahoo.com/quote/TGT?p=TGT
