This will be used as Target's cost of debt. The weightings of debt and equity are 69% debt and 31% equity. This gives us a weighted average cost of capital for Target of:
(4.757)(.69) + (9.26)(.31) = 6.15%
Target represents a higher risk level compared to Wal-Mart. This is reflected in the bond rating, but also is indicated by the higher degree of leverage. Additionally, the overall stronger financial performance of Wal-Mart hints at a company that should have a lower cost of capital.
11) Appendix E shows the charts of each of these companies for the past three years (MSN Moneycentral, 2009). Wal-Mart's stock lost some value in 2007 at a time when Target's stock gained value. They tracked each other for the first month but began to split in June 2007 with Target climbing and Wal-Mart dropping. In July 2007, both companies broke even, with Wal-Mart stock essentially flatlining and Target stock peaking then falling by the end of the month. The firms tracked each other closely in August. Target showed more volatility in September of 2007, pulling away from Wal-Mart. The firms tracked each other once again in October, with Target again showing higher volatility. It is at this point that the respective performance of the two firm's two begins to reverse course. In November 2007, there is significant volatility in the stocks of both companies. Target begins to underperform Wal-Mart, then outperforms, reversing course on seemingly a daily basis. The year closes out with Wal-Mart exhibiting slow but steady growth and Target stock generally tanking, shedding over 10% of its value in the course of the month.
2008 begins with both firms tracking each other closely, and gaining steadily over the course of the month. February 2008 again sees the two stocks tracking one another in relatively steady pattern. March, however, sees a divergence as Wal-Mart stock begins to gain ground, while Target's stock is both more volatile and heading slightly south. While Target flatlines in May 2008, Wal-Mart stock continues its upward trajectory. Both stocks remain relatively flat for June 2008. In July 2008 Wal-Mart continues it relatively flat pattern, but Target moves slightly downward. At this point, the differences between the two firms have been clearly established. Wal-Mart stock is 20% higher than it was at the start of the period; Target's stock is over 20% lower.
August of 2008 brings recovery both firms, with Target enjoying a stronger rebound in its stock price. The first week of September was positive for both firms, but the rest of the month was less pleasurable as the stock of both companies began a long slide. This slide continued into October, although for Wal-Mart the freefall ended earlier and was less intense. After Wal-Mart's share price stabilized, Target's continued to fall. Wal-Mart struggled in November, showing a drop in share price; Target's share price dropped substantially and at one point it was off 50% from its May 2007 level. The stocks traded in lockstep in December, with Target being more volatile.
This year began with a stronger dropoff for Wal-Mart than for Target. Both stocks fell during February, with Wal-Mart exhibiting greater volatility again. Wal-Mart's March performance was relatively stable with a slight upward growth trend at the end. Target saw its nadir in March, before beginning a recovery. This recovery continued in April, while Wal-Mart's performance continued to decline. All told, however, the intensity of Target's declines, particularly in the latter months of 2008, and the steadiness of Wal-Mart's share price increases, has resulted in Wal-Mart being up slightly over the past two years while Target is down 30% over that same time period.
12) To calculate the net present value of the next five years' earnings at Wal-Mart, we first take the cost of capital, which we established was 3.87%. The five-year average net income growth is 8.39% (MSN Moneycentral, 2009). We then apply the growth rate to last year's net income. This gives us the raw value for each of the next five years. We then discount this back to a present value using the discount rate, and then add each of these present values up to derive the Net Present Value. For Wal-Mart the NPV of the next five years' worth of earnings is $76, 271 (see Appendix F).
The P/E ratio for Wal-Mart over each of the past four quarters is derived from the price at the end of each quarter and the 12-month trailing EPS for each quarter. The P/E for Wal-Mart has been declining steadily over the past year. The company's stock price has reflected weakness in the market overall, which has hampered sale growth at Wal-Mart. The stock price also reflects increased pessimism about Wal-Mart's growth prospects.
Although the trend towards a lower P/E has been evident in...
xiii). That overconfidence can lead to "false confidence" which in turn leads to serious mistakes and losses for companies. Hayward presents four sources of false confidence: a) getting "too full of ourselves" (an inflated view of "achievements and capabilities"); b) getting "in our own way" (pride leads a manager to "tackle single-handedly decisions that should be made" with others in the company; c) "Kidding ourselves about our situation" (due
Whole Foods Managerial economics Managerial economics: Whole Foods In many ways, Whole Foods defies current assumptions of what constitutes a successful company strategy. It is an organic niche supermarket that prices its products relatively high in relation to its competitors. Yet it has become wildly successful in recent years, even defying conventional predictions of its likely demise during the credit crisis of 2008. This paper will explore the 'secret' of Whole Foods success
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