The company that I selected was Walgreens Boots Alliance, Inc.
(commonly known as Walgreens). According to Bloomberg,
Walgreens is a part of the Retail & Wholesale industry, but more
specifically it operates in the retail drugstores space (Walgreens Boots
Alliance Inc, n.d.). Interestingly, however, Walgreens could be
considered to be in a variety of other industries due to how
integrated its business model is. For example, Walgreens' own
website says its in the "healthcare, pharmacy and retail" industry
(Walgreens - About Us, n.d.) while Forbes classifies it as "Drug Retail"
(Walgreen Company Overview, n.d.).
The weighted average cost of capital (WACC) is the average after-tax
cost of a company’s various capital sources and can be increased
when the Fed hikes interest rates or impacted when external factors
like corporate tax rates, economic conditions, and market conditions
are affected (Folger, 2022). According to AlphaSpread, as of
December 7th Walgreens WACC was 7.14% (WBA Current Discount
Rate, n.d.).
Some risks that Walgreens and the industry could be facing which
could impact their WACC is rising Fed interest rates. According to the
Financial Times last month, the central bank increased its main
interest rate by 0.75 percentage points for the fourth time in a row
which means that Walgreens' risk-free rate immediately increases
raising their WACC (Smith, 2022). Another risk to Walgreens' WACC
could come from poor economic conditions that increase the risk of
default, which increases the default premium and the WACC (Folger,
2022). A Harvard Business Review article from October confirmed
this thought saying, "If expectations unanchor, the cost would be far
higher than a downturn — it would be an era of higher volatility and a
less favorable business environment (Carlsson-Szlezak et al., 2022)
which confirms that poor economic conditions may be an active risk
to WACC as well.
References:
Bloomberg. (n.d.). Walgreens Boots Alliance Inc - Company profile and
news. Bloomberg.com. Retrieved December 8, 2022, from
https://www.bloomberg.com/profile/company/WBA:US
Carlsson-Szlezak, P., Reeves, M., & Swartz, P. (2022, October 7). The
curse of the strong U.S. economy. Harvard Business Review. Retrieved
December 8, 2022, from https://hbr.org/2022/10/the-curse-of-the-
strong-u-s-
economy#:~:text=The%20U.S.%20economy%2C%20though%20clea
rly,the%20September%202022%20jobs%20report.
Folger, J. (2022, September 1). Interest rates and other factors that
affect WACC. Investopedia. Retrieved December 8, 2022, from
https://www.investopedia.com/ask/answers/070114/how-do-
interest-rates-affect-weighted-average-cost-capital-wacc-
calculation.asp#:~:text=When%20the%20Fed%20hikes%20interest,e
conomic%20conditions%2C%20and%20market%20conditions.
Forbes Magazine. (n.d.). Walgreen | Company Overview & News.
Forbes. Retrieved December 8, 2022, from
https://www.forbes.com/companies/walgreen/?sh=1738a7464a93
Smith, C. (2022, November 2). Jay Powell warns US rates will peak at
higher level than expected. Subscribe to read | Financial Times.
Retrieved December 8, 2022, from
https://www.ft.com/content/2fba4664-a496-4a5b-820e-
f258b3e2bd81
Walgreens - About Us. Walgreens. (n.d.). Retrieved December 8, 2022,
from https://jobs.walgreens.com/en/about-
us#:~:text=Walgreens%20Boots%20Alliance%20(Nasdaq%3A%20W
BA,customers%20and%20patients%20every%20day.
WBA Current Discount Rate. AlphaSpread.com. (n.d.). Retrieved
December 8, 2022, from
https://www.alphaspread.com/security/nasdaq/wba/discount-rate
