-
QUESTION 36
Title:
Optimal Capital Structure
Paper Details
Explain the capital structure of the organization of Wal-Mart. Does Wal-Mart rely more heavily on debt or equity? What is Wal-Mart’s structure weights (%’s)? How does this structure contribute to the overall risk of Wal-Mart? Do you feel they have chosen an ideal capital structure? What would you do to improve their structure if you could be CEO for a day.
| Subject | Business | Pages | 3 | Style | APA |
|---|
Answer
Optimal Capital Structure
Capital structure of business is important to provide financial assessment of an entity helping make appropriate decisions. This paper explains the capital structure of Wal-Mart.
Wal-Mart relies heavily on equity capital and debt to smaller extent. The company however has remained committed in reducing its debt load. The equity capital of Wal-Mart comes from the treasury stock, common stock, and retained earnings. For instance, the capital equity of Wal-Mart as of January 2106 was $83.6 billion (Downie, 2016). Wal-Mart has debts as a result of its financing from notes, bonds and bank loans. The long-term debt as at January 2016 was $38.2 billion (Downie, 2016).
Wall Mart structure weight –weighted average cost of capital is at 2.81 percent. Return on investment capital of the stores is 12.9% (Gurufocus, 2017). The company generates higher returns on its investment compared to the costs it incurs in raising the required capital for its investment; hence, the earnings are more than returns
The structure contributes to the overall risk of the Company in either ways. The debt structure has enabled the company adopt a conservative structure where it pays its debt from the accrued profits (Wal-Mart, 2017). Low debt to equity ratio has made the business view debt as a constrain hence, helping it reduce risk. The low debt ratio and high interest coverage ratio has made the company to earn high credit rating and achieve low cost of borrowing (Buckley, Defina, & Root, 2016). It also reduces risk by insulating them from market shocks of rising interest rates.
This capitals structure is therefore ideal because of the many advantages mention previously. The company has an opportunity to access to high credit and this can expedite its expansion and growth strategy (Wall Mart Inc. 2017).
If I were the CEO of the company, I would still embrace this capital structure to help me realize the objectives of the company. The structure is essential as it provides the organization and opportunity to expand and grow. It also enhances accessibility to credit facilities as debts are kept to minimal.
References
|
Buckley, C., Defina,P., & Root, L. (2016). Walmart VS Amazon Economist 2016 Investment Case Competition sponsored by Real Vision . Retrieved. http://www.economist.com/sites/default/files/shidler_college_of_business_ws.pdf Downie, R. (2016). Wal-Mart Stock: Capital Structure Analysis (WMT). Retrieved from: http://www.investopedia.com/articles/markets/052816/walmart-stock-capital- structure-analysis-wmt.asp Gurufocus. (2017). Wal-Mart Stores Inc (NYSE:WMT) WACC %:2.81% As of Today. Retrieved from: https://www.gurufocus.com/term/wacc/WMT/WACC/Wal- Mart%2BStores%2BInc Wal-Mart (2017). Wal-Mart 2017 annual report. Retrieved from: https://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR- %281%29.pdf Wall Mart Inc. (2017). Wal-Mart . Retrieved from: http://people.stern.nyu.edu/adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pd f |