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Strategic Financial Recommendations for Walmart: Cost of Capital and Economic

Environment Analysis

Aurora Ayson

Yenny Alejandra Rincon Castillo

Bivash Ranjan Chowdhury

Hossain Mohammad Dalim

Mary Cyarra De Vera

Mary Cybille De Vera

Diwakar LNU

Md Musa Haque

No Participation:

Md Saiful Islam

International American University

FIN 500: FINANCIAL MANAGEMENT

Dr. Alex Sherm

June 06, 2024

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Table of Contents

Executive Summary.........................................................................................................................4

Introduction......................................................................................................................................5

Walmart Overview...........................................................................................................................7

Working Capital Analysis................................................................................................................8

a. Definition and Importance of Working Capital:...................................................................8

b. Working Capital Trends at Walmart:....................................................................................9

c. Components of Working Capital:.......................................................................................10

Bond Valuation..............................................................................................................................15

a. Bond Issuance and Valuation:.............................................................................................15

b. Impact of Bond Strategy on Walmart's Capital Structure:..................................................16

Return on Capital Assets................................................................................................................17

a. Calculation of Return on Assets (ROA):............................................................................17

b. Calculation of Return on Invested Capital (ROIC):...........................................................18

Cost of capital analysis:.................................................................................................................19

a. Definition and components:................................................................................................19

b. The Cost of Capital for Walmart:........................................................................................19

c. Importance of the cost of capital:.......................................................................................21

Economic environmental analysis:................................................................................................24

a. Macroeconomic factors:.....................................................................................................24
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b. Industry specific factors:.....................................................................................................24

Impact of economic factors on Walmart financial performance:...................................................26

Recommendation Summary...........................................................................................................28

Conclusion.....................................................................................................................................31

References......................................................................................................................................33
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Executive Summary

This comprehensive report delves into the financial intricacies of Walmart, one of the world's

largest retail corporations. Through an exhaustive examination of Walmart's working capital and

bond strategies, this report aims to provide a deep understanding of the company's financial

management practices and their implications on its overall performance. Furthermore,

recommendations based on the findings are presented to steer Walmart's future financial

decisions and bolster its competitive edge in the ever-evolving retail industry landscape.

Key words:

 Financial strategy

 Report

 Financial Analysis

 Management

 Valuation
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Introduction

The following project provides an in-depth overview of Walmart, tracing its humble beginnings

to its current status as a global retail powerhouse. It outlines the objectives of the financial

analysis and underscores the importance of dissecting Walmart's financial strategies within the

broader context of its business operations. The main objective of this project is providing a detail

financial analysis for Walmart company according with learning from the financial management

course.

Walmart dominates worldwide retail with its large network, wide selection, and cheap pricing. A

detailed financial analysis of Walmart centered on capital expenses and the economy is expanded

in this study. My major goal as a financial counselor is to help Walmart succeed with long-term

financial solutions. This study examines Walmart's macroeconomic factors affecting financial

decisions and the cost of capital, including debt and equity. Identifying and implementing these

techniques can improve financial performance and growth (Alam, 2016).

Walmart's finances support this. Revenue growth keeps the company a retail leader. It faces

market volatility, client tastes changing, and fierce competition. To adapt and thrive, Walmart has

enhanced supply chain efficiency and extended its e-commerce platform. Walmart's financial

strategy uses capital cost data. The cost of capital demonstrates how well a corporation uses debt

and equity for operations and expansion. Lower capital costs for new projects and expansions

boost profits. However, rising financial costs can hinder strategic growth. Walmart must optimize

its cost of capital to be competitive and accomplish financial goals.

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Walmart has a similar economy. Inflation, interest rates, and economic growth affect retail sales

and consumer spending. When the economy is good, consumer confidence and sales grow; when

it's not, they suffer. Walmart's external financial factors may be explained by these aspects

(Barberá Marcilla, 2014). This analysis will inform risk-aversion and opportunity-taking

methods. Walmart's cost of capital in relation to the economy and strategic adjustments to

improve its financial health and development potential are the report's key goals. Walmart may

flourish in the ever-changing retail market by considering these factors.

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Walmart Overview

This section offers an exhaustive examination of Walmart's business model, encompassing its

core operations, diverse revenue streams, extensive geographical footprint, and formidable

competition. Moreover, recent strategic initiatives undertaken by Walmart to reinforce its market

leadership are meticulously scrutinized.

“From our humble beginnings as a small discount retailer in Rogers, Ark., Walmart has opened

thousands of stores in the U.S. and expanded internationally. Through innovation, we're creating

a seamless experience to let customers shop anytime and anywhere online and in stores. We are

creating opportunities and bringing value to customers and communities around the globe.

Walmart operates more than 10,500 stores and numerous eCommerce websites in 19 countries.

We employ 2.1 million associates around the world — nearly 1.6 million in the U.S. alone.”

About Walmart. (s. f.). About Walmart. https://corporate.walmart.com/about

Let’s see the Walmart overview in 2023:

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Working Capital Analysis

a. Definition and Importance of Working Capital:

A comprehensive discussion on the essence and significance of working capital sets the stage for

a detailed analysis of Walmart's working capital management practices. The intricacies of

working capital as a barometer of a company's short-term financial health and operational

efficiency are thoroughly explored.

For a better understanding let’s get a definition of working capital:

Working capital is the amount of cash and other current assets a business has available after all

its current liabilities are accounted for. Understanding how much working capital you have on

hand to pay bills as they come due is critical to the success of an organization.

Then how calculate the working capital, the formula is the next one:

Working capital = current assets—current liabilities

Working capital is a good indicator of a company’s ability to handle its day-to-day operating

expenses. If a working capital is a negative balance, then that shows a downward trend which

can lead to further increasing a company’s debts to keep it functioning. Negative working

balance in certain cases, my not always be a bad thing.

Retail companies like Walmart, have a negative working capital oftentimes because of

customers that pay upfront. So, the cash that is generated is often used by such companies to pay

off their Accounts Payable, instead of keeping large amounts of cash on hand, which is more

efficient for them. Also, oftentimes, current assets of cash are often converted onto capital goods
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to benefit the business which reduces the current assets, but does not take into account the added

value of the capital goods in the equation. Your current liabilities remain the same, if not larger,

after such a conversion, which can also lead to a negative working balance, in many situations.

b. Working Capital Trends at Walmart:

Utilizing Walmart's balance sheet data spanning multiple years, this section delves into the

nuances of working capital trends, unraveling insights into Walmart's liquidity position, working

capital efficiency, and operational prowess.

For a better understanding let’s see the Walmart working capital in 2023 and 2024 as of Jan 31:
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With the information above we can determine working capital of Walmart for 2023 and 2024

respectively:

Walmart working capital 2023: $ 75,655 - $ 92,198= - $ 16,543

In 2023 Walmart had a negative working capital that indicates Walmart had insufficient cash and

current assets to cover the passive in the short terms, Walmart need to improve on liquidity it

would be incur in a financial issue.

Walmart working capital 2024: $ 75,877 - $ 92,415= - $ -16,538

Having a improve of $5, in 2024 Walmart still having liquidity issues, if the company wants to

improve this scenario should cover with borrow, short term investments, collect due payments,

refinance the assets.

c. Components of Working Capital:

An in-depth examination of the components of working capital, including inventory, accounts

receivable, and accounts payable, sheds light on Walmart's strategies for managing each element

to optimize overall working capital performance.

 Inventory:

Walmart utilizes various methods to account for and value its inventories depending upon the

nature of the store formats and business in each of its segments, resulting in inventories that are

recorded at the lower cost or market or net realizable value, as appropriate.

In Walmart US segment inventories are primarily accounted under retail inventory method of

accounted (RIM) to determinate inventory cost using the last- in last- out (LIFO) variation

method
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Now the Walmart inventory turnover that showing how many times the company has sold and

replaced inventory during a period of time.

Inventory turnover = COGS/ Average value of inventory

According with the formula the Walmart inventory turnover for 2024 is the following:

2024: $490 billion ÷ [($54.9 billion + $56.6 billion)/2] = 8.8

Fast-forward to 2024, Walmart reported cost of sales of $490 billion for the fiscal year ending

January 2024. It also reported ending inventory of $54.9 billion as of 1/31/2024, down from

$56.6 billion as of 1/31/2023.

This signals that from 2022 to 2024, Walmart increased its inventory turnover ratio. Management

should further explore the cause; it may be due to more efficient processes, or it may be due to
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more demand for the products it offers. However, very generally speaking, the movement of this

ratio from 2022 to 2024 appears to be positive.

 Accounts receivables:

Walmart's meticulous approach to managing accounts receivable and accounts payable is

dissected, emphasizing its robust vendor relationships, shrewd negotiation of payment terms, and

relentless pursuit of optimizing cash conversion cycles.

The accounts receivables turnover ratio measures how efficiently a company is in collecting

receivables from its clients.

Formula receivables turnover = net credit sales / average accounts receivables

Average accounts receivables (ACR)= $7,933+$ 8,796 / 2 = 12,331

Accounts receivable turnover ratio (ARTR)

ARTR 2023= 605,881/ 12,331= 49.13

ARTR 2024= 642,637 / 12,331= 52.11

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We can interpret the ratio to mean that Walmart collected its receivables in 2024, 52.11 times on

average that year. In other words, the company converted its receivables to cash 52.11 times that

year. A company could compare several years to ascertain whether 52.11 is an improvement or

an indication of a slower collection process.

 Cash Management:

Walmart's meticulous cash management practices take center stage, encompassing cash flow

forecasting, cash conversion cycle optimization, and strategic working capital financing

initiatives aimed at maximizing cash liquidity while minimizing idle cash balances and financing

costs.

Cash management is the process of managing cash inflows and outflows. Cash management can

be important for both individuals and companies. It is a key component of a company's financial

stability in business.

Formula Current ratio= Current assets / Current Liabilities

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Current ratio 2024 = 76,877/ 92,415 = 0.83

Walmart, have been able to negotiate much longer-than-average payment terms with their

suppliers. If a retailer doesn’t offer credit to its customers, this can show on its balance sheet as

high payables balance relative to its receivables balance. Walmart’s current ratio as of January

31, 2023 was 0.82 Walmart’s current ratio as of January 31, 2024 was 0.83 that means more

capable a company is of paying its obligations because it has a larger proportion of short-term

asset value relative to the value of its short-term liabilities.

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Bond Valuation

a. Bond Issuance and Valuation:

Walmart's meticulous bond issuance process and rigorous bond valuation methodologies are

examined in detail, taking into account various factors such as coupon rates, maturity dates,

credit ratings, and prevailing interest rates, and their implications on Walmart's financing costs.

Walmart Inc. operates discount stores, supercenters, and neighborhood markets. The Company

offers merchandise such as apparel, house wares, small appliances, electronics, musical

instruments, books, home improvement, shoes, jewelry, toddler, games, household essentials,

pets, pharmaceutical products, party supplies, and automotive tools. Walmart serves customers

worldwide.

Domestic bonds: Walmart, 7.55% 15feb2030, USD (US931142BF98).

 Walmart bonds Market

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b. Impact of Bond Strategy on Walmart's Capital Structure:

This section delves into the profound impact of Walmart's bond strategy on its overall capital

structure, financial leverage, and cost of capital optimization, elucidating Walmart's strategic

maneuvers to maintain an optimal capital structure while mitigating financial risks.

Walmart issues bonds to finance its operations. Corporate bonds make up one of the most

significant components of the U.S. bond market and are considered the world's largest securities

market. Walmart uses the proceeds from bond sales for a wide variety of purposes, including

financing ongoing mergers and acquisitions, buying new equipment, investing in research and

development, buying back their own stock, paying dividends to shareholders, and even

refinancing existing debt. Most Walmart bonds can be classified according to their maturity,

which is the date when Walmart has to pay back the principal to investors. Maturities can be

short-term, medium-term, or long-term (more than ten years). Longer-term bonds usually offer

higher interest rates but may entail additional risks.

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Return on Capital Assets

a. Calculation of Return on Assets (ROA):

Walmart's return on assets (ROA) is meticulously calculated and analyzed to gauge its capital

efficiency and profitability, benchmarked against industry peers and historical performance.

The main reason for the increase in the return on assets (ROA) ratio during the year 2024 is the

increase in profitability measured by the net profit margin ratio.

ROA= Net income/ Total Asset

ROA 2024 = 648,128/ 252,399= 2.5722

ROA formula indicates that Every dollar that Walmart invested in assets generated 3% cents of

net income.
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b. Calculation of Return on Invested Capital (ROIC):

A rigorous analysis of Walmart's return on invested capital (ROIC) is undertaken to assess its

ability to generate returns from both tangible and intangible assets, providing insights into

Walmart's capital allocation strategies and operational effectiveness.

Walmart Inc. ROIC deteriorated from 2022 to 2023 but then improved from 2023 to 2024

exceeding 2022 level.

ROIC = Net Operating Profits After Tax (NOPAT) / Invested Capital

ROIC 2024 = 100 × 18,517 ÷ 155,389 = 11.92%

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Cost of Capital Analysis:

a. Definition and Components:

The cost of capital, one of the most significant financial measures, reveals how much return on

investment a business requires to stay relevant and attract investors. The cost of debt and equity

are included, weighted by their capital structure positions. Cost of capital affects investment

possibilities, project feasibility, and long-term financial planning (Alsharari, 2021).

b. The Cost of Capital for Walmart:

The following factors are used in order to ascertain Walmart's cost of capital:

Debt Cost:

To get Walmart's cost of debt, divide the total debt by interest expenditure as shown in the

financial statements. Imagine a total debt of $45 billion and an interest expense of $2 billion

based on Walmart's financial records from 2023. Next, we figure out the cost of debt:

interest expense 2 billion

cost of debt= = =4.44%
total debt 45 billion

As a result of Walmart's excellent credit rating, the company's cheap cost of debt is indicative of

its robust creditworthiness and advantageous borrowing conditions.

Cost of equity:

To calculate the cost of equity, one uses the following formula from the Capital Asset Pricing

Model (CAPM):

The equation for the cost of equity is R𝑓 + 𝛽(𝑅m - 𝑅𝑓).

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Where:

The risk-free rate is denoted by R𝑓, Walmart's beta is denoted by 𝛽, and 𝑅𝑢−𝑅𝑍 is the

reference point.

The equity market risk premium is represented as 𝑅m - 𝑅𝑓.

Assuming:

There is a 3% risk-free rate and a 0.3 beta for Walmart.

A premium of 5% is applied to stock market risk (𝑅𝑻− R𝑓 𝑅m - 𝑅𝑓).

The equity cost is:

The cost of equity is 4.5% multiplied by 3% plus 0.3 times 5%.

Cost of Capital Weighted Average:

Cost of debt and cost of equity are weighted according to their proportions in Walmart's capital

structure to determine WACC. According to the given assumptions, the weighted average cost of

capital (WACC) for Walmart would be:

WACC = ( 𝐸 / 𝑉 ) × 𝑅 𝑒 + ( 𝐷 / 𝑉 ) × 𝑅 𝑑 × ( 1 − 𝑇 )

where:

The ratio of equity to total assets is 60%, the ratio of debt to total assets is 40%, the cost of

equity is 4.5%, the cost of debt is 4.44 %, and the corporate tax rate is assumed to be 21%.

The weighted average cost of capital (WACC) is 4.10 percent, which is calculated as 0.60% plus

(0.40% plus 4.44 percent) times (1 minus 0.21 percent).

WACC= (0.60×4.5%)+(0.40×4.44%×(1−0.21))=2.70%+1.40%=4.10%
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Implication of Walmart current cost of capital:

Walmart's WACC is 4.10%, which is low for other companies and indicates favorable financing.

Walmart's low cost of capital lets it launch new initiatives, giving it a competitive edge and

increasing profits. Low-cost strategic decisions like increasing e-commerce, investing in

technology, and upgrading supply chains can be made more aggressively. With reduced WACC,

Walmart may be better positioned for long-term growth in an unpredictable environment by

increasing values and investor trust (Muda & Dharsuky, 2021).

Importance of the cost of capital:

Walmart evaluates investments based on capital cost. If the expected return exceeds WACC, the

project is viable. Knowing its cost of capital helps Walmart make wise expansions, acquisitions,

and investments. Walmart's 2016 acquisition of Jet.com shows how capital expenditures effect

strategy. Walmart agreed to improve its online storefront to compete with Amazon. Jet.com's

expected returns and weighted average cost of capital may convince Walmart that the acquisition

will benefit its long-term growth goal.

c. Importance of the cost of capital:

Walmart evaluates investments based on capital cost. If the expected return exceeds WACC, the

project is viable. Knowing its cost of capital helps Walmart make wise expansions, acquisitions,

and investments. Walmart's 2016 acquisition of Jet.com shows how capital expenditures effect

strategy. Walmart agreed to improve its online storefront to compete with Amazon. Jet.com's

expected returns and weighted average cost of capital may convince Walmart that the acquisition

will benefit its long-term growth goal.

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Graph: Walmart WACC

Source: (Miao, 2023).

Another example is Walmart's ongoing supply chain efficiency and technology investments.

Walmart bases project viability on capital cost. Data analytics and automation investments are

evaluated to improve operational efficiency, profitability, and returns above the weighted average

cost of capital. Capital cost information helps Walmart invest. Walmart compares international

markets' profitability to their WACC while expanding. This maximizes resource use and reduces

financial risk by investing in high-return firms (Charles & Uford, 2023).

Walmart prioritizes recession investments by knowing its cost of capital. Walmart will invest in

projects with a higher return than the weighted average cost of capital regardless of the economy.
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Walmart's capital cost helps strategic financial planning. Walmart evaluates and pursues long-

term growth, competitive advantage, and shareholder value initiatives using the Weighted

Average Cost of Capital (WACC). Walmart will stay agile and lucrative with this strategy in the

ever-changing retail market (Xie & Cooke, 2019).

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Economic environmental analysis:

a. Macroeconomic factors:

Inflation: The buying power of consumers and Walmart's pricing policies are both impacted by

inflation. Walmart will have to manage supplier cost pressures while keeping prices affordable

for consumers, especially because recent U.S. inflation data shows a climb to about 4% in 2023.

Interest Rates: The availability of consumer credit and the cost of borrowing money are affected

by interest rates, which are now hovering around 5.25 percent in the United States. As a result of

increasing borrowing costs, Walmart's expansion plans could be impacted, and consumers could

cut back on non-essential spending if interest rates were to rise.

Economic growth: Consumer spending habits and Walmart's bottom line are both affected by

economic growth, which is quantified by GDP. Walmart should witness steady consumer

spending in 2023 thanks to moderate growth in the US of about 2%, but the company needs to be

on the lookout for shifts in economic conditions that could affect sales (Walmart Inc., 2023).

b. Industry specific factors:

Competition: Walmart has stiff competition in the retail industry, especially from online retailers

like Amazon, which impacts the company's pricing tactics and market share. As an example, in

order to maintain its market share, Walmart has responded to competitive pressure by heavily

investing in its online platform and delivery services.

Technological advancement: technological Innovation and investment are requirements for

Walmart because of the increase of e-commerce. The rapid development of retail technology has
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triggered Walmart to put money into AI and robotics to enhance the shopping experience for

customers and to simplify inner processes.

Regulatory changes: doing a business may additionally cost rise or fall relying on how strict

new policies are for things like environmental safety, labor requirements, and change coverage.

For example, Walmart has raised pay in reaction to minimum wage rises in multiple states, which

has an impact on the company's labor charges. Tariffs on items from key providers like China are

simply one instance of the way converting trade policies should affect Walmart's supply chain

costs.

Future economic scenarios and implications: Walmart benefits from rising consumer spending

and R&D investment as the economy improves. In tight times, Walmart may cut costs and

provide competitive prices to stay ahead. Operational cost management must adapt to regulatory

changes, especially labor and commerce regulations. Understanding these macroeconomic and

industry-specific factors helps Walmart navigate the economy and thrive sustainably (Brigham &

Ehrhardt, 2016).
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Impact of economic factors on Walmart financial performance:

Revenue: Consumer spending drops dramatically during recessions, affecting Walmart's

revenue. Walmart's revenue mix was harmed by the 2020 COVID-19 pandemic, even as demand

for several vital items increased. Consumer spending habits altered generally. Walmart benefits

from recessions' heightened demand for value-oriented products due to its low-cost reputation.

Cost: Rising inflation and interest rates affect operating and finance costs. Due to rising supplier

prices and inflation to 4% in 2023, COGS has grown. Pricing must be modified to maintain

profit margins amid inflation. Higher interest rates have raised loan costs, which affect Walmart's

operating expenses and investment funds. Current interest rate: 5.25% (Lam, 2018).

Investment decisions: Walmart's expansion and capital investment plans depend on economic

stability. Walmart has expanded and invested much in technology and supply chain changes

during good economic times. In an uncertain economy, people may be more cautious with their

money and invest in necessary initiatives with high return prospects. Walmart may invest more in

its steady internet and food divisions if it worries about the economy.

Trend Illustrative: A graph of Walmart's revenue trends over the past few years shows how

economic conditions affect sales. A graph showing Walmart's operations and finance expenses vs

inflation and interest rates can show the direct monetary effect. These visuals show how

economic issues affect Walmart's finances (Gielens et al., 2018).

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Figure: Walmart revenue

Source: (Durand & Baud, 2024).

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Recommendation Summary

Based on the extensive analysis conducted, a comprehensive set of recommendations is proposed

for Walmart:

 Continuously monitor and optimize working capital metrics to bolster operational

efficiency and liquidity.

 Scrutinize bond issuance strategies to capitalize on favorable market conditions and

minimize financing costs.

 Maintain a balanced capital structure to fortify Walmart's long-term growth prospects

while safeguarding against financial risks.

Specific Recommendation:

 Market penetration: Walmart strategy involves selling more to the target market keeping

the prices and cost low, offering discounts, promotion and special deals.

 Market development: enter in new markets as international markets and have new

consumes and adapting to new location, also open a new location store.
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 Product Development: offer new products to the market thought new product

development adapting to new markets and innovations also increasing marketing

campaigns.

Short term recommendation:

Data analytics-optimized inventory levels to minimize carrying costs and improved accounts

payable terms to increase liquidity would improve Walmart's cash flow management. In

unpredictable economic circumstances, efficient inventory management can liberate large

working capital to improve cash flow.

Walmart should refinance its debt while rates are low to save money on interest payments when

interest rates fluctuate. It might enhance profits by renegotiating some of its $45 billion debt to

reduce interest expenditures each year.

Renegotiating supplier contracts and energy efficiency programs can fight inflation. Due to its

focus on sustainable energy consumption in stores, Walmart can reduce inflation-related

operational costs by lowering utility bills (Ross & Jordan, 2017).

Long term recommendation:

Diversify our revenue streams from brick-and-mortar retailers to online markets. Expanding to

India and improving digital platforms can assist weather domestic market fluctuations.

Keep investing in tech to improve supply chain and customer service. AI-driven logistics

solutions can boost competitiveness. These solutions ease processes, lower costs, and speed

delivery.

Fund Sustainable Business Practices. Walmart is using renewable energy and reducing its carbon
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footprint to attract environmentally conscious customers and comply with evolving

environmental demands (Damodaran, 2012).

Justification and challenges:

These proposals are supported by financial and economic analysis. Debt refinancing and cash

flow management can directly address inflation and interest rate cost concerns. Diversify your

revenue streams and invest in technology to be competitive and innovative in today's fast-paced

industry. However, implementation costs and regulatory hurdles remain. Walmart prioritizes

high-impact areas and involves stakeholders in sustainability projects to ensure acceptance and

compliance (Ellickson, 2016).

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Conclusion

In conclusion, Walmart's financial analysis underscores the paramount importance of meticulous

working capital management and strategic bond strategies in steering sustainable growth and

profitability. By meticulously aligning its financial practices with operational imperatives and

market dynamics, Walmart can navigate the challenges of the retail industry landscape and

unlock enduring value for its stakeholders.

 Walmart should expand to international markets making sure that found a good location

 Walmart price strategy is the key for the company growth

 Start new marketing strategy will help to increase considerably

 Walmart should improve working capital KPI indicates a low liquidity

 For liquidity improvement is highly recommend increase the investments short term.

Walmart's finances depend on capital costs and the economy. Our analysis reveals that

understanding these factors is essential for strategic decision-making. Financial stability

demands effectively navigating macroeconomic variables like inflation, interest rates, and

economic growth, while balancing debt and equity to manage the cost of capital can enhance

profitability. Walmart can better handle economic ups and downs and competitive pressures by

improving cash flow management, refinancing debt, and controlling costs in the short term and

diversifying revenue streams, investing in technology, and implementing sustainable practices in

the long term. These activities are essential to Walmart's competitiveness and long-term growth.

These ideas have immense potential. Better liquidity and lower credit rates can make Walmart

more flexible. Strategic investments in sustainability and technology can boost operational
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savings and brand reputation, attracting customers and investors. Walmart can maintain market

leadership and financial stability for years with urgent action.

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