Walmart wanted to determine its cost of capital. The company is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of $100 (total funds raised $5million). They carry an annual coupon of 12%, are due to be redeemed in four years and are currently trading at $110. The company's shares have a market value of $4million, the return on risk-free government securities is 9% and the risk premium for an average-risk share has been 6%, Walmart's share have a lower than average-risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk preminim - this is 0.90.
The corporate tax rate is 30%. Walmart has a net asset figure of $3.5million showing in its statement of financial position.
1. Calculate the cost of debt capital.
2. Calculate the cost of equity capital.
3. Calculate the weighted average cost of capital.
4. Should Walmart use the WACC for all future projects and SBUs? Explain your answer.