ADVANCED FINANCIAL MANAGEMENT Advanced Financial Management



Advanced Financial Management

Part A- Wal-Mart

1. Market D/E ratio for Wal-Mart

The Debt Ratio measures the intensity of the entire debt of the company in relation to its funds, measures the percentage of total funds provided by creditors.

Debt Ratio = Total Assets / Total Liabilities

This indicator shows the degree of involvement in financing commitments the company in relation to the level of commitment to equity. This is due to the possibility of any entity's debts held by financial resources.

WAL-MART

Market D/E ratio

Short Term Debt/Current Portion of Long Term Debt

$6,348,000

Long Term Debt

$47,079,000

Stock price

$69.35

Shares outstanding

3,400,675

Market value of equity

$235,836,811

Market value of Debt

$53,427,000

 

 

Market D/E ratio

22.65%

2. Cost of levered equity for Wal-Mart

Cost of levered equity indicates the expected returns that investors look for while investing in the equity funds. This can be obtained through CPAM'

Rs= Rf + BL (Rm-Rf)

Where:

Rf = Risk free rate of return

BL = Levered Equity beta

Rm= Market return

WAL-MART

Cost of levered equity

Risk Free Rate

4.50%

Equity Risk Prem

5.00%

Levered Beta

0.35

Cost of levered equity

6.3%

3. Weighted average cost of capital (WACC)

Weighted average cost of capital (WACC)

Cost of levered equity

Market value of equity

$235,836,811

Market value of Debt

$53,427,000

Cost of Debt

6.70%

Cost of equity

6.3%

Tax

30%

WACC

6.0%

4. Two scenarios

1st scenarios: Wal-Mart issues $1 billion in new debt to repurchase stock

WAL-MART

Market D/E ratio

Short Term Debt/Current Portion of Long Term Debt

$6,348,000

Long Term Debt

$57,079,000

Stock price

$69.35

Shares outstanding

3,400,675

Market value of equity

$235,836,811

Market value of Debt

$63,427,000

 

 

Market D/E ratio

26.89%

2st scenarios: Issuing $1 billion in stock to repurchase debt

WAL-MART

Market D/E ratio

Short Term Debt/Current Portion of Long Term Debt

$6,348,000

Long Term Debt

$47,079,000

Stock price

$69.35

Shares outstanding

13,400,675

Market value of equity

$929,336,811

Market value of Debt

$53,427,000

 

 

Market D/E ratio

5.75%

5. Relationship between capital structure and the cost of capital

Capital Structure

In finance, capital structure refers to the way a company finances its assets through a combination of equity, debt or hybrid securities. It is then the composition or 'structure' of its liabilities. For example, a company that sells $ 20 billion in capital and $ 80 billion in debt it is said that 20% is financed with stock and 80% is financed with debt. In fact, the capital structure can be very complex and includes dozens of sources. The gear ratio is the ratio of capital employed of the company that comes from outside the corporate financing, for example, taking a short term loan, etc.

Cost of capital

Cost of capital is the price that the company pays for its use, i.e. annual cost of servicing the debt to investors and creditors. Quantitatively, it is measured as a percentage rate that characterizes the ratio of the total amount of these expenses to the amount of capital. It is considered as an important feature of the company's capital is its cost. The concept of cost of capital is one of the basic theories of financial management. It characterizes the level of return on invested capital, which should provide the company not to reduce its market value. The lower the cost of borrowed funds, the higher the investment opportunities in the enterprise, the more profit it ...