Wmt Equity the Beta for Wal-Mart, According

WMT Equity

The beta for Wal-Mart, according to MSN Moneycentral, is 0.29. According to Yahoo! Finance the yield to maturity on a Treasury bond that is due 15-Mar-12 is 0.296%. We will assume a market risk premium of 7%. With these figures, the cost of equity for Wal-Mart can be calculated using the capital asset pricing model (CAPM):

Ra = RF + ? (Rm -- Rf)

Ra = 0.296 + (.29)(7)

Ra = 2.326%

This cost of equity is lower than I had expected. In general, the cost of equity for a firm is fairly high. The reason why Wal-Mart has such a low cost of equity is that the company's beta is so low. Wal-Mart has very little correlation with the broad market, and is not very volatile. As a result, Wal-Mart's cost of equity is low, because it is much less risky than the market as a whole. Given its beta, Wal-Mart should have a cost of equity lower than that of the market, so the beta makes sense.

The beta for Target is 0.96. The beta for Costco is 0.74. The cost of equity for Target is as follows:

0.296 + (.96)(7) = 7.016%

The cost of equity for Costco is:

0.296 + (.74)(7) = 5.476%

I am not surprised that Target has a higher cost of equity than Wal-Mart. I had predicted that for a number of reasons Target is a riskier company and therefore a greater risk premium would be required to make an investment in Target.

What does surprise me is that Costco has a higher cost of equity than does Wal-Mart. I felt Costco might be a bit less risky. However, part of that assessment was based on future expectations, while the beta is based on past performance. That said, I felt Costco was less risky than Wal-Mart and apparently the market disagrees with me.

4. Using the dividend growth model, you would start by acquiring Wal-Mart's stock price and dividend rate. The stock price is $52 and the dividend is $1.46 per share. The dividend growth rate will also be required. To find the cost of equity, solve for this cost in the equation:

Value =

(Current Dividend * (1 + Dividend Growth))

(Required Return -- Dividend Growth)

Arbitrage pricing theory is similar in structure to the capital asset pricing model. The difference is that whereas CAPM relies on the correlation between the company's stock price and the broad market (the beta), APT relies on correlations with macroeconomic variables. The choice of variables is up to the analyst, and these variables must be subject to weighted average. So for example, an analyst using APT would determine the correlation between Wal-Mart's stock price and the GDP, the inflation rate, the interest rate and the current account balance. These would each be giving a weighting that adds to 100%. Then, the weighted average of these different correlations would be used to determine the cost of equity.