Corporate Finance Case Study Analysis

This case study analyzes the cost of capital for Target Corporation and compares it with Wal-Mart's. It computes the weighted average cost of capital (WACC) for both companies, highlighting the differences in their financial strategies and risk profiles. The findings suggest that Target has a lower cost of capital, indicating less risk in business expansion compared to Wal-Mart, which has a higher cost of capital and associated risks.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Introduction:....................................................................................................................................2
Cost of capital of Target:.................................................................................................................2
Comparison with the cost of capital of Wal-Mart and explanation of the difference:....................3
Conclusion:......................................................................................................................................4
References and Bibliographies:.......................................................................................................5

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Introduction:
The current paper aims to compute and evaluate the cost of capital of the provided
organization, Target Corporation. The case study provides certain information, which has helped
in computing the overall cost of capital for the organization. The detailed information about Wal-
Mart has been provided in the case study and the way of calculating weighted average cost of
capital in the context of the organization has been presented as well. Finally, the paper would
conduct a comparison between the cost of capital of Wal-Mart and Target Corporation and
adequate explanation would be made regarding the difference.
Cost of capital of Target:
Based on the case study, it has been found from the annual report of Target Corporation
in 2012 that the borrowing cost or the cost of debt averaged 4.6% during the year. In this context,
Brotherson et al., (2015) advocated that the cost of debt is reliant on a variety of factors like the
rate of inflation. If the rate of inflation in US increases, it would automatically increase the
overall cost of debt for Target Corporation. In addition, the cost of debt of Target is highly
dependent on credit rating, since it receives publicly traded debt (Damodaran, 2016). .
However, the cost of equity of Target Corporation has not been provided in the case
study like that of Wal-Mart. In this case, the annual report of the organization has been used to
identify its cost of equity, which is taken as 8.9% (Corporate.target.com, 2017). The average tax
rate of the organization has been provided as 34.27%. In addition, the interest-bearing debt of the
organization has been provided as $17,483. Finally, the shares of Target Corporation have been

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traded at $50.81 per share and the average number of outstanding shares is 679.1 million. It has
been assumed that the interest-bearing debt is a market value estimate of the debt.
As the share price and number of outstanding shares are provided, the market value of
equity is obtained as ($50.81 x 679.1) = $34,505.071 million. Now by adding the total value of
debt and total value of equity, the estimated market value of Target Corporation is obtained as
$51,988.071 ($17,483 + $34,505.71). As the relative amounts of debt and equity are computed,
the proportion of weight to be assigned to debt is 33.63% ($17,483/$51,988.071). Similarly, the
proportion of weight to be assigned to equity is 66.37%. Finally, the overall WACC for Target
Corporation is computed as follows:
WACC = (Percentage of equity financing x Cost of equity) + {Percentage of debt financing x
Cost of debt x (1 – Tax rate)}
WACC = (66.37 x 8.9%) + {33.63% x 4.6% x (1 – 34.27%)}
WACC = 0.05 + (0.01 x 0.66)
WACC = 0.05 + 0.0066
WACC = 0.0566 or 5.66%
Comparison with the cost of capital of Wal-Mart and explanation of the difference:
It has been found out that the cost of capital of Target has been obtained as 5.66%, while
the computation of WACC of Wal-Mart based on the provided information is depicted as
follows:
WACC = (0.80 x 9.70%) + {0.20 x 4.50% x (1 – 32.56%)}

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WACC = 0.08 + (0.0081 x 0.6744)
WACC = 0.0854 or 8.54%
In this case, the cost of capital of Target is much lower in contrast to that of Wal-Mart.
Along with this, another research report has estimated that the cost of capital of Target
Corporation is 10% and the computed WACC is quite below the estimation. The possible point
of difference in the value of WACC computed above and as found out in the research report is
due to the cost of equity assumption (Frank & Shen, 2016). This is because the research report
might have applied the CAPM method to determine the cost of equity, which varies with the
value as depicted in the annual report of Target Corporation. In addition, since the value of
WACC for Wal-Mart is higher, it indicates greater risk; however, the overall return might be
higher.
Conclusion:
From the above discussion, it has been found that Target has a lower cost of capital when
compared to that of Wal-Mart. The cost of capital for both the organizations has been calculated
based on the provided information. As the cost of capital for Target is lower, it denotes that the
risk related to business expansion or undertaking any new project is minimal; however, the
return is limited as well. On the other hand, the greater cost of capital for Wal-Mart suggests
greater risk with higher return on equity for the shareholders of the organization.

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References and Bibliographies:
Brotherson, W. T., Eades, K. M., Harris, R. S., & Higgins, R. C. (2015). 'Best Practices' in
Estimating the Cost of Capital: An Update.
Corporate.target.com. (2017). Retrieved 21 August 2017, from
https://corporate.target.com/_media/TargetCorp/annualreports/content/download/pdf/
Annual-Report.pdf?ext=.pdf
Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of
Financial Economics, 119(2), 300-315.
Hann, R. N., Ogneva, M., & Ozbas, O. (2013). Corporate diversification and the cost of
capital. The journal of finance, 68(5), 1961-1999.
Li, X. (2015). Accounting conservatism and the cost of capital: An international
analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.