According to GuruFocus, As of today (2022-12-08), Walmart's
weighted average cost of capital is 5.99%. Walmart generates higher
returns on investment than it costs the company to raise the capital
needed for that investment (GuruFocus, 2022). The WACC is a
measure of the overall cost of capital that a company has. It includes
various types of capital sources such as bonds, common stock, and
preferred stock. The weight of these products is added to the WACC
to arrive at a final value.
The Federal Reserve has a huge influence on the short-term interest
rates that are offered by banks. It influences the WACC through the
fed funds rate, which is the interest rate that banks charge each other
for overnight loans. The changes in the interest rates caused by the
Federal Reserve affect the risk-free rate, which is the theoretical rate
of return that an investment can offer. A decrease or increase in the
federal funds rate can affect a company's WACC. The risk-free rate is
a vital factor that determines the cost of capital, and the interest rate
that the firm pays is equivalent to the risk-free rate minus the default
premium (Martin, 2017).
The higher the federal funds rate, the more that the company's risk-
free rate will increase. If the rate was 2% and the company's default
premium was 1%, then the interest rate that the company pays is 3%.
If the rate is raised to 2.5% and the default premium is still at 1%, then
the interest rate on the WACC will increase to 3.5%.
Other factors such as economic conditions, corporate tax rates, and
market conditions can also affect the WACC. One of the most
obvious consequences of higher corporate taxes is that the interest
that a company pays on its debt is considered to be tax-deductible.
Lower corporate taxes increase the WACC, while higher ones
decrease it.
Economic conditions can make it difficult to evaluate the impact of
WACC on a company's operations. A good economic environment
can lower the risk of default, which can reduce the WACC and the
premium. It's also possible that the Fed will increase the interest rates
eventually. The stock market can also have various consequences.
For instance, increasing volatility can cause investors to demand
higher risk premiums, which can increase the cost of capital for a
company. However, volatility can also decrease the value of an asset,
which makes it cheaper for a company to repurchase shares.
GuruFocus (2022). Walmart (NYSE:WMT) WACC %. Retrieved from
https://www.gurufocus.com/term/wacc/WMT/WACC-
Percentage/Walmart
Martin, Fernando. (2017). Federal Reserve Bank. How Might
Increases in the Fed Funds Rate Impact Other Interest Rates?
Retrieved from https://www.stlouisfed.org/on-the-
economy/2017/october/increases-fed-funds-rate-impact-other-
interest-rates
