Target Corporation: Cost of Capital

According to its annual report, as of January 31, 2012, Target’s borrowing costs averaged 4.6 percent, and its tax rate was 34.27 percent. A research report estimated Target’s cost of capital at 10.5 percent. The firm had interest-bearing debt of $17,483. Moreover, Target’s stock was trading at $50.81 per share, and there were 679.1 million shares outstanding. Now, let’s assume Target’s amount of debt is also a market value estimate of the debt. Let’s also assume the current debt and equity values are at Target’s optimal capital structure.

1. Based on market value estimates, what is Target’s cost of capital?

2. How does it compare to Walmart’s, and what explains the difference?

Info I have on Wal-Mart:

Wal-Mart borrowing cost are 4.5% and tax rate was 32.56

weight of debt= .20

weight of equity=.80

stock is $61.36 and 3,460 million shares outstanding

additional info:

For the fiscal year ending January 31, 2012, Target’s EBIT was $5,322,* and its tax rate was 34.3 percent. Its short-term borrowings were $3,786, and its long-term debt was $13,697. In addition, the firm’s book value of equity was $15,821. ?

For the fiscal year ending January 31, 2012 (2011), Target had total revenues of (in millions) $69,865 ($67,390) and net earnings of $2,929 ($2,920). Its total assets were $46,630 ($43,705) and its equity was $15,821 ($15,487).

YES all in millions