Wal-Mart and Target WACC
We computed the WACC for Wal-Mart and Target based on their most current financials. The weights of debt and equity were obtained from MorningStar.com. The risk free rate is the current rate for 30 year treasuries, and the cost of debt is the current 20 year rate on corporate bonds rated AA and A+. The tax rates were estimated by dividing the taxes paid from the operating income from Wal-Mart and Targets income statements. The market risk premium was obtained from the class, and is set at 5.5%. The betas and all other information were obtained from Google Finance. The goal of this project was to calculate different levels of WACC for Wal-Mart and Targets. We started by calculating the firms current WACC, and then a new WACC that had 50% more debt.
To start, we had to calculate the firms cost of equity. We took the risk free rate and added it to the beta multiplied by the market risk premium. For example – Wal-Mart’s cost of equity was calculated as follows:
Cost of Equity = 4.38% + .33(5.5%)
We then calculated WACC by taking the weight of debt times the after tax cost of debt, plus the weight of equity times the cost of equity. We then increased debt by 1.5 for both companies, and re-levered their betas. After we re-levered the betas a new cost of equity can be calculated and then a new WACC is calculated. The results are typical, with WACC staying similar and the cost of equity rising.
The following table shows Wal-Mart and Targets weights and costs of debt and equity, along with their WACC. The proposed column shows an increased debt level of 50%.

Walmart | Proposed | Debt | 52,100,000,000.00 | 44.5% | 78,150,000,000.00 | 54.6% | Equity | 65,000,000,000.00 | 55.5% | 65,000,000,000.00 | 45.4% | Interest | 2,205,000,000.00 | | | | Risk Free | | 4.38% | | 4.38% | Tax Rate |