Calculate and analyze the company's Weighted Average Cost of Capital (WACC)
Week 5 Project – Company Stock and Cost of Capital Analysis
In this assignment you will
• Perform a detailed stock price analysis on your company’s stock, and
• Calculate and analyze the company’s Weighted Average Cost of Capital (WACC)
1. Stock Price Analysis:
a. Monthly Stock Price Analysis:
? In Yahoo! Finance go to the Historical Prices page and import into Excel the last 5 years of monthly stock prices (use the ending date as of the end of the previous month). For the below activities use the adjusting closed price (“Adj Close”)
? What is the current stock price? What were the highest and lowest stock price values during this period?
For the remaining items in this section you will analyze the Year-Over-Year returns. In your spreadsheet, calculate the Year-Over-Year (YoY) return for each month. (Please submit this worksheet in Excel with your written paper.) The calculation for this is:
(month – same month prior year) / (same month prior year)
? What were the highest and lowest YoY returns during this period?
? Calculate the mean or average of these YoY returns from your sample.
? Calculate the standard deviation of the YoY returns. (In Excel, use the STDEV function.)
b. Graphical View of Variability:
? In Yahoo! Finance go to the Basic Chart for your company. Select the 5 year (“5Y”) Range of the chart. In the Compare line select the S&P 500 and then press the “Compare” button.
? Copy and paste this chart into this section of your paper.
? Interpret your observations. Does the general movement of your company’s returns follow that of the S&P 500? Is the company’s stock price today higher than the company’s stock price at the beginning of this 5 year period?
2. Analysis of WACC
a. Calculation of WACC for your company
You will need to identify each component of the WACC formula and calculate the overall WACC.
The WACC formula for a company that uses debt and equity is as follows:
WACC = % Debt * Cost of Debt * (1 – Tax Rate) + % Equity * Cost of Equity
You should use Yahoo! Finance and / or the company’s most recent 10K report to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement.
? Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, “Short/Current Long Term Debt”)
? Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)
? % Debt = Debt / (Debt + Equity)
? % Equity = 1 – % Debt
? Cost of Debt = Interest Expense / Debt
? Tax Rate = Income Tax Expense / Income Before Tax
? Cost of Equity: Use the CAPM equation to calculate this
Cost of Equity = Risk free rate + Beta * (Market Risk Premium)
? Risk free rate: look up the yield on 10 year US Treasury bonds
? Beta: This is on the Key Statistics page in Yahoo! Finance
? Market Risk Premium: Assume 11% minus the risk-free rate
b. Interpretation of WACC for Your Company
Indicate what the WACC value you derived means for your company. What role does the WACC play for company managers when they are evaluating new projects to undertake? How would company managers and investors use the WACC for an overall company valuation analysis?
3. Paper Mechanics
Please complete your work in Excel. For the calculation section of the assignment, each parameter, its data and the corresponding calculations should be clearly indicated and easy to follow. Your spreadsheet should be professional in its presentation with appropriate formatting and organization. Points will be taken off the final grade for these errors and omissions at your instructor’s discretion.
Please read the rubric below before starting the assignment.
Task Points Available Points Awarded
1. Stock Price Analysis
a. Monthly Stock Price Analysis
b. Graphical View of Variability 0-25
2. Calculation of WACC:
a. Debt component
b. Equity component
c. Overall WACC
d. Interpretation of WACC for your company 0-25
Less points for spelling, grammar, punctuation, and citation errors (APA)
Less points for late/incomplete work
The company I choose and wrote about is walmart and below is the paper i wrote on walmart in second week;
Company Overview: Wal-Mart was established in 1962 by Sam Walton (Kahn, 1999). His vision was to set up a retail store that can provide the public with excellence in the workplace, customer service and lowest prices. Wal-Mart Stores, Inc. is the largest retailer in the world, it is also rated the largest corporation in the world (Kahn, 1999). Wal-Mart is the largest nongovernmental employer in the U.S with more than 1.2 million employees. In the U.S, Wal-Mart has 1,478 discount stores 1,471 Supercenters selling discount outlets goods and grocery stores, 538 Sam’s Clubs, and 64 Neighborhood Markets selling food, drugs, etc. It is a well-known American company that operates retail stores that include grocery stores, discounts warehouse clubs and combination of general merchandise store (Kahn, 1999). The company sells electronics, baby & kids and adult clothing, video games, toys, fitness and sports instruments, jewelry, groceries, etc. Wal-Mart’s concept is to offer customers a wide range of name-brand goods at deep discounts prices. Since its establishment, Wal-Mart has been able to keep prices low while turning profit through sales volume. Wal-Mart’s advertising costs are lower than most competitors. Wal-Mart is a champion of buy-American program. The Company has promoted buy American. It has worked with manufacturers and suppliers to produce products that could compete against imports. The management had made it clear that American suppliers must commit to improving their facilities and machinery, and remain financially conservative and work to fill their requirements, and improve employee productivity. The company continue to practice product conversions where it buys competitively priced U.S.-made goods instead of imports. It started its international marketing in 1991, in Canada, Puerto Rico, Argentina, Brazil, China, Germany, Mexico, Puerto Rico, South Korea, and the United Kingdom (Kahn, 1999).
Wal-Mart operates its own pharmacy, auto service center, jewelry, clothing, Shoe Company, and other goods. Taking the company’s business global and successfully selling their products and services in international markets had posed many challenges (Woods, 2011).
Competitive Overview: Walmart rivals include Target, Costco, Kmart and Sears but it has remained the dominant retailer by revenue in the world (Soni, 2015). In North America, Walmart’s primary competitors are Target, Costco, Kmart, Publix, ShopKo and Meijer, The Real Canadian Superstore and Giant Tiger, and Mexico’s Commercial Mexicana and Soriana. and the BJ’s Wholesale Club chain. In grocery business its competitors include WinCo Foods, Kroger, smaller retailers especially dollar stores, such as Family Dollar and Dollar General. Walmart has also faced fierce competition in some foreign markets. The “Every Day Low Price” (EDLP) strategy makes Wal-Mart different from its competitors. It is obvious that competition exists between Wal-Mart and its rivalries, however in terms of market share it is difficult for other discount retailers to compete with Wal-Mart. Due to its diversification it has many competitors but Costco and Target are the direct competitor of Wal-Mart in domestic market and they pose more significant threat to Wal-Mart than any other store (Soni, 2015). Costco is the major discount wholesaler that can compete with Wal-Mart’s Sam’s Club (Gough, 2013). Target poses the greatest threat in terms of competing with Wal-Mart at all levels. Target has adopted the Wal-Mart low price strategy and it has enabled the company gain more market share.
In its international operations, Walmart faces competition from other multinational and local supermarket and big chain firms such as Carrefour SA (CRRFY (CA.PA) in France, Metro AG (MEO.DE) (MTTRY) in Germany, Tesco (TSCDY) (TSCO.L) in the United Kingdom, Loblaw Companies (L.TO) in Canada, and Ahold (AHONY) in the Netherlands (Soni, 2015). The list of Wal-Mart’s competitors and relevant factors are presented in Appendix A. It summarized several relevant factors, such as the market cap mill, net income, P/E, dividend yield and other relevant metrics. Wal-Mart’s Market Cap mill was higher than any of their competitors. Wal-Mart is one of the greatest success stories ever, however it discovered that its formula does not fit every Culture. It has not been able to succeed in India, Russia, Germany and South Korea. In Russia, it failed to acquire a local chain. In Germany, Germans didn’t like Walmart employees handling their groceries at the check-out line. Male customers also misinterpreted the smiling employees as flirting with them. In Korea, people are usually short and Wal-Mart built stores with huge shelves as a result customers have to use ladders in order to reach the top shelves.
Financial overview: For the fiscal year ending January 31, 2011, Walmart reported net income of $15.4 billion (equivalent to $16.1 billion in 2015) on $422 billion (equivalent to $442 billion in 2015) of revenue with a 24.7 percent gross profit margin. The company’s international operations accounted for $109.2 billion (equivalent to $114 billion in 2015), or 26.1 percent, of sales (Wal-Mart, n.d). Walmart is the world’s 18th largest public corporation, and the largest public corporation when ranked by revenue (Wal-Mart, n.d). From year to year, Wal-Mart Stores Inc. continued to have little change in their bottom and top line from $16.0B USD to $16.4BUSD), and from $476.3B USD to $485.7B USD. It has been able to reduce the percentage of sales devoted to the cost of goods sold from 1.70% to 1.64%.
Financial Ratios Based on the Income Statement
Current Ratio = Current Assets / Current Liabilities
This ratio shows the number of times short-term assets cover short-term liabilities. This reflects the ability of the Wal-Mart to service its current obligations. The number is indicating a strong ability to service short-term obligations.
63,278,000/65,272,000; 61,185,000/69,345,000; 59,940,000/71,818,000
0.96945; 0.88233; 0.83461
The Gross Profit Margin is the firm’s financial health. It serves as the source for paying additional expenses and future savings.
Where:COGS = Cost of Goods Sold
Gross Profit Margin for 2015, 2014, 2013, 2012 are as follows;
0.2845; 0.2482; 0.2482; 0.2498
Shows how well Wal-Mart controlled its costs. The higher the profit margin is the better.
Profit Margin = Profit/Revenue. This is a useful tool that investors use to determine which company to invest.
120,565,000/485,651,000; 118,225,000/476,294,000; 116,354,000/468,651,000; 111,516,000/446,509,000
24.8%; 24.8%; 24.8%, 25.9%
Wal-Mart and competitors
Wal-Mart; 120,565,000/485,651,000; 118,225,000/476,294,000; 116,354,000/468,651,000
24.8%; 24.8%; 24.8%
Costco; 12.6%; 12.3%
Target; 29.4; 29.8%; 31%
The operating profit margin = operating profit/ Revenue
Wal-Mart; 27,147,000/485,651,000; 26,872,000/476,294,000; 27,725,000/468,651,000
0.0559; 0.0564; 0.0591
Costco; 3,220,000/112,640,000; 3,053,000/105,156,000
Target; 4,535,000/72,618,000; 5,170,000/71,279,000; 5,740,000/73,301,000
0.0625; 0.0725; 0.0783
Return on Assets = Net income/Total Assets
Wal-Mart; 16,363,000/203,706,000; 16,022,000/204,751,000; 16,999,000/203,105,000
0.0803; 0.0782; 0.0837
Costco; 2,058,000/33,024,000; 2,039,000/30,283,000
Target; (1,636)/40,446,000; 1,971,000/41,404,000; 2,999,000/46,461,000
-0.0404; 0.0476; 0.0645
Return on Equity = Net Income/average shareholders’ equity
Wal-Mart; 16,363,000/81,394,000; 16,022,000/76,255,000; 16,999,000/76,343,000
0.201; 0.210; 0.0.223
Costco; 2,054,000/112,303,000; 2,039,000/10,833,000
Target; -1,636,000/13,997,000; 1,971,000/16,373,000; 2,999,000/16,433,000
-0.117; 0.12; 0.182
After examining the annual balance sheets and income statements, of Wal-Mart and its competitors (Costco and Target), it is obvious that Target had the strongest profit and operating profit margin for 2013, 2014 and 2015 respectively. This indicated a higher level of profitability for Target as well as its ability to controls its costs.
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