FIN501 Module 3 SLP - Topic: Time Cost of Equity



FIN501 Module 3 SLP - Topic: Time Cost of Equity

Question No. 1

Cost of Equity for Wal-Mart Company

Cost of equity for Wal-Mart Company is calculated as follows.

CAPM = ßj [RM - RF]

Whereas,

Bj = Wal-mart company share's beta

RM = expected return on market portfolio

RF= risk free return on government bond

For this part, values have used as follows.

Bj = 0.45(Yahoo Finance, 2012a)

RM = 10%

RF= 3%

RM-RF = 10% - 3% = 7%

Therefore,

CAPM = 0.45 x (10% - 3%)

CAPM = 0.45 x (7%)

CAPM = 0.0315 = 3.15%

Cost of equity for Wal-Mart is 3.15%.

Question No. 2

Wal-Mart Cost of Equity Comparison with Average Firm Cost

The cost of equity for Wal-Mart is considerably lower than I expected. I expected that on average $1 getting cost approximate 6-7% to a company. However, above presented calculation shows that the average cost of equity for Wal-Mart is only 3.15% due to it lower beta than market share beta.

The average cost of capital for a firm in the S&P 500 is 10.2 percent. I think that Wal-Mart Company firm should have a lower cost of capital than the average firm because it results in decreasing the financing charges for a company. It also increases the overall return on the investment due to lower interest and cost of capital charges.

Question No. 3

Cost of Equity Comparison Industry Players

For Sears Corporation

Beta = 2.51(Yahoo Finance, 2012b)

Therefore,

CAPM = 2.51 x (10% - 3%)

CAPM = 2.51 x (7%)

CAPM = 0.1757 = 17.57%

Cost of equity for Sears Corporation is 17.57%.

For Target Corporation

Beta = 0.76(Yahoo Finance, 2012c)

Therefore,

CAPM = 0.76 x (10% - 3%)

CAPM = 0.76 x (7%)

CAPM = 0.0532 = 5.32%

Cost of equity for Target Corporation is 5.32%.

Cost of equity for Target Corporation is relatively near to the cost of equity of Wal-Mart. Therefore, it does not ...