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SLP 1 OPM 500

Wal-Mart is one of the greatest American companies and it has been received with both praises as well as criticism. The current endeavor nevertheless is more focused on the financial aspect of the organization, namely the cost of its equity. At a general level, the cost of equity is understood as "the return that stockholders require for a company" (Investopedia, 2011). In other words, it is the amount of money that the organization has to pay in order to reward the investments made by the shareowners.

The cost of capital is an important financial tool as it sits at the basis of efficient decision making. In other words, the cost of equity portraits whether a certain endeavor or investment has the ability to generate shareholder value. There are several ways to identify the cost of equity, one of the most relevant of them being the Capital Asset Pricing Model. According to Rick A. Cooper (2011) at the Reference for Business website, the Capital Asset Pricing Model is a "mathematical model that seeks to explain the relationship between risk and return in a rational equilibrium market."

With the aid of the CAPM, the cost of equity at Wal-Mart is measured in terms of the "relationship between risk and expected return" (Investopedia, 2011). The formula used in the revealed below:

RA = RF + ssA (RM -- RF), where

RF represents the risk free rate ssA represents the risk of the Wal-Mart security, and RM represents the expected market return.

For simplicity purposes, the risk free rate is accepted at a value of 3 and the expected market return is accepted at a value of 10. This then indicates that (RM -- RF) = 7. In a context in which the risk of the Wal-Mart security is of 0.39, the cost of equity at Wal-Mart is of: RA = 3 + 0.39 x 7 = 3 + 2.73 = 5.73

This computed cost of capital is somewhat lower than the expected cost of equity, especially in a context in which the cost of equity for a S&P 500 organization is of 10.2 and as the difference between the two is significant. The company would be satisfied with an average cost of capital. A lower one would allow the company to fund its projects through more cost effective capitals, but this could also imply that the organization's appeal to prospective investors is decreased.

In order however to gain a more comprehensive look at Wal-Mart's cost of capital, it would be necessary to compare it to that of other representative business icons in the United States, such as McDonald's or Microsoft.

RA MCD = 3 + 0.39 x 7 = 3 + 2.73 = 5.73

RA MSFT = 3 + 1.00 x 7 = 3 + 7 = 10

The cost of capital for McDonald's is equal to that at Wal-Mart, result which is not surprising in a context in which the two organizations activate in the foods industry. In terms of the comparison between Wal-Mart's cost of capital and Microsoft's, the difference is somewhat surprising as it is rather high. A difference was nevertheless expected given the dynamics of the IT industry as well as the structural differences between the IT and consumer retail industries.