Wal-Mart Capital Structure and Financial Analysis Essay

Wal-Mart Capital Structure and Financial Analysis - Essay Example Total Assets (Fixed + Current) = $27,638_ x 100 $120,223 = 22.9% Debt to Equity Ratio The debt to equity ratio measures the relationship between a company's debt capital and equity capital. It shows the percentage of a company's equity that has been financed by external debts. The debt-to-equity ratio for Wal-Mart has been calculated as: Debt-to-Equity Ratio = Total Debt Capital x 100 Total Equity Capital = $27,638 x 100 $49,396 = 55.95% CALCULATION OF WEIGHTED AVERAGE COST OF CAPITAL In the Weighted Average Cost of Capital (WACC) involves the calculation of separate items in the capital employed and then weighting the cost of each element by its proportion of the total capital employed. There are following factors in the Wal-Mart's total capital: Equity (Common Stock) Debt (Long-term Debts) $ % Of Total 4,311 Common Stock of $0.10 (par) 423m 1.75% Long-term Debt 23,669m 98.24% Total Capital Employed 24,092m 100% Cost of Equity The cost of equity estimates the cost of common and preferred stock. But for Wal-Mart, this calculation will not include preference stock because the company has not issued any preference shares. The analysis of Wal-Mart's annual report reveals that the company is expecting to pay $0.150 dividend per share to its common shareholders. For dividend growth, we assume it to be 10% annually. The cost of common share capital has been estimated with the help of following formula: Cost of Common Share Capital = (Next annual dividend / current market price) + annual dividend growth = ($0.150 per share / $50.49 per share) + 10% = 10.29% per annum. Cost of Debt The calculation of cost of debt will encompass all the interest bearing long-term debts of the company. According to the Wal-Mart's...There are following factors in the Wal-Mart's total capital: The cost of equity estimates the cost of common and preferred stock. But for Wal-Mart, this calculation will not include preference stock because the company has not issued any preference shares. The analysis of Wal-Mart's annual report reveals that the company is expecting to pay $0.150 dividend per share to its common shareholders. For dividend growth, we assume it to be 10% annually. The cost of common share capital has been estimated with the help of following formula: The calculation of cost of debt will encompass all the interest bearing long-term debts of the company. According to the Wal-Mart's annual report, the company's weighted average effective interest rate on long-term debt is 4.08% in 2005. The tax rate applicable to the company for the year is 34.7%. The cost of long-term debt has been estimated as: As analysed from the company's financial statements and the calculation of financial ratios, the capital structure of Wal-Mart has become evident. Wal-Mart has structured its capital funding in a way its external debts or borrowings do not exceed its total equity to a greater extent.