MSN Moneycentral (2011), the Beta for Wal-Mart

¶ … MSN Moneycentral (2011), the beta for Wal-Mart (WMT) is 0.33. This indicates that the company has a very low degree of correlation with the broader market, and is a less volatile investment than the broad market.

According to Yahoo! Finance (2011), the rate of return on a one-year U.S. Treasury bond is 0.318%. It is assumed that the market risk premium is 7%. This assumption means that the market rate of return is traditionally 7.318%.

The cost of equity for Wal-Mart is therefore as follows:

Rj = RF + ?j [RM - RF]

Rj = 0.318 + 0.33 (7)

Rj = 0.318 + 2.31

Rj = 2.628%

The cost of equity is lower than I had expected. Wal-Mart is a more stable company than I had thought. The beta is very low, indicating that Wal-Mart does not have much volatility. Most companies, especially retailers, struggled during the past recession and I would have thought that this would affect Wal-Mart as much as any other company, but apparently Wal-Mart performed well during much of the recession, as supplemental research points out (LaMotta, 2009). Knowing this, it is not a surprise that Wal-Mart has a cost of equity much lower than the average firm. Being as successful as it is, and operating in both major Western markets and in China, Wal-Mart is evidently well insulated from financial crises. Thus, it makes sense that Wal-Mart has a lower cost of equity than most other companies.

3. Some of the other companies that can be compared to Wal-Mart are Target (TGT), Costco (COST) and Amazon (AMZN), each of which is a major competitor for one of Wal-Mart's businesses. According to MSN Moneycentral (2011), Target has a beta of 0.93; Costco has a beta of 0.76 and Amazon has a beta of 1.16. Each of these companies has a higher cost of equity than Wal-Mart, because of these higher betas. This is logical. Wal-Mart is a major competitor in each of these businesses, as the #1 retailer, #2 warehouse retailer and #2 online retailer respectively. This means that Wal-Mart is substantially larger and more diversified than any of these other companies. As a result, it is not surprising that each of these companies has a higher beta and cost of equity than Wal-Mart.

4. For Wal-Mart, it would be easy to find out the cost of equity using either the dividend growth model or arbitrage pricing theory. The dividend growth model assumes that the value of the stock is directly tied to existing dividends and the expected growth rate of those dividends (Investopedia, 2011). The formula is as follows:

Dividend / (Discount -- dividend growth rate)

The discount rate should be the cost of equity.

Arbitrage pricing theory works in a similar manner to CAPM. The primary difference is that while in CAPM the beta is the one variable that is taken into account, in APT many such variables are taken into account. The correlation of Wal-Mart's stock price changes to changes in several key economic variables, each of the user's choosing, can be taken. These are given weightings that again are decided by the user. The weighted average correlation is then used in place of the beta to derive the value of the stock, using a formula that works on the same principle as CAPM (Investopedia, 2011, 2).