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[Student First and Last Name] [Name of College] [Date in this format Month day, year]

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Part (3): Investment policy of the firm Capital structure of Wal-Mart: Capital structure of WMT is a mixture of debt and equity, it depends more on equity capital than the debt capital. It is cheaper for the companies to use debt capital or financial leverage more to generate capital because it is cheaper and the interest payment is tax deductible. But WMT is inclined towards reducing it debt capital while its competitors in the market are more skewed towards using financial leverage. Generating capital by issuance of stocks and accumulated net earnings is commonly known as equity capital, total shareholder’s equity of WMT in 2016 was $83.6 billion while in 2017 it is $ 80.5 billion which includes $ 305 million of common stock which is less than the last year’s stock of $ 317 million at par value. Capital in access of par value for 2017 is $ 2.4 billion while it was $ 1.8 billion in 2016, while non controlling interest is about $ 2.7 billion on 2017 and $3.1 billion in 2016 which clearly shoes that WMT is reducing its debt burden and depending more on equity. Reduction in the equity of the company is mainly due to increase in accumulated comprehensive loss of $ 14,323 billion in 2017 compared to $ 11.6 billion in 2016 (Investopedia, 2016) Now looking at the debt capital of the company which is commonly known as financing through bonds, notes and bank loans against which company has to pay interest. In 2017 company’s long-term debt consist of $36 billion while in 2016 it was $38.2 billion which is showing downward trend. Long-term debt mainly consist of unsecured notes which bear average interest rate of 1.6 to 5.3% and maturities ranging from 2017 to 2039 (Rayan Downie, 2016). Now coming towards the trend of long-term debt in 2014 it was $53.6 billion, in 2015 it was $47.3 billion, in 2016 it was 43.6 billion while in 2017 it is $39.4 billion which shows there is downward trend shown in the consecutive four years financials because company is avoiding taking out new debt in form of notes which will become due in near future. So the measurement of cost of capital is very important for any company as capital comes with the cost credit ratings of the company plays important role in this regard. Higher the ratings lower the cost of capital as company position is strong in the market it can get debt from the capital markets at lower cost. (Yahoo finance, 2015).

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Calculation of WACC: The cost of capital for a company is comprised of the cost of its debt (rd) and the cost of its equity (re), weighted by the proportion of debt and equity in the company's capital structure (V). The firm value is the sum of D and E (). This weighted-average cost of capital (WACC) is calculated by:

We can simplify this formula and can be written as: WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate) E is known as market value of equity which is $ 235988.930 for WMT from today market (NYSE, WMT, 2017). D is the market value of debt which is taken as book value of Debt which includes current portion of long term debt and capital lease obligation which is equal to about $47986 million in 2017 for WMT. So E= 235988.930 D= 47986 Now we can calculate weight for equity and debt from this information which is as follows: 1. E/ (E+D) = 235988.930/ (235988.930+ 47986) = 0.831 2. D/ (E+D) = 47986 / (235988.930+ 47986) = 0.169 Cost of equity (re) is calculated using CAPM model in this case we take this value from economic indicators to be 2.71 % for current use. Cost of debt (rd) is calculated using last year interest expense / average debt comes out to be 2367/ 47986 = 4.9327 %

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Tax rate is the average of two years tax rate comes out to be 30.29 % Putting the values in equation 2 we get: WACC = 0.831 * 2.71% + 0.169 * 4.9327% * (1- 30.29%) = 2.83 %

Conclusion:

Even though the overall profitability has declined, the sales have improved due to the investment in e-commerce websites resulting in improved Returns on Investment and profit margin of the company. Cost of capital is less than the returns on the investment as we can see from the WACC calculations; capital is generating high returns on the investments. If this trend of positive excess returns continue to maintain the value of the company will increase with the increase in the growth.

References:

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Downie, R. (2016, may 28). investopedia. Retrieved 10 08, 2017, from google: http://www.investopedia.com/articles/markets/052816/walmart-stock-capital-structure-analysiswmt.asp NYSE. (2017). gurufocus. Retrieved 10 08, 2017, from google: https://www.gurufocus.com/term/wacc/WMT/WACC/Wal-Mart+Stores+Inc soni, p. (2015, march 3). yahoo finance. Retrieved 10 08, 2017, from Walmart's capital structure : https://finance.yahoo.com/news/walmart-capital-structure-mix-debt-230502403.html...