WACC of Target Corporation

WACC of Target Corporation

Before we compute the WACC of Target Corporation we must know the following points in to consideration.

PARTICULARS

2008

2007

Equity Financing

35%

35%

Debt Financing

65%

65%

Stock Price

$45

$72

Dividend per share

$0.62

$0.54

Tax Rate

37.40%

38.40%

Cost of Equity ( D/P +g)

$0.62 / 45 + 15.45% = 16.82%

$.54 / 72 +15.45% =16.2%

Cost of Debt Kd (1-T)

2.1%(1 – 37.40%) = 1.3%

5.2%(1 – 38.4%) = 3.2%

 

WACC 2008:

WACC = (% of Equity) (Cost of Equity) + (% of Debt) (Cost of Debt) (1-T)

= (35%) (16.82%) + (65%) (1.3%) (1-37.40%) = 6.4%

WACC 2007:

WACC = (% of Equity) (Cost of Equity) + (% of Debt) (Cost of Debt) (1-T)

= (35%)(16.2%)+(65%)(3.20%)(1-38.4%) = 7%

   After evaluating all the necessary computations regarding the calculation of WACC, it would be safe to assume that Target Corporation’s Weighted Average Cost of Capital slightly drops in the year 2008 from 7% to 6.4% (Target Co., 2008-2007). This slight reduction in cost indicates the company’s dependency on equity financing reduces to 35% in the year 2007 as compare to the previous years. This low dependency on equity financing showed a reflection on its stock price of $45 in the year 2008, and Target Corporation’s payout ratio to its stock holders is rises to 22% in 2008 as compare to 16% in 2007(Target Co., 2008-2006). As far as Debt financing is concerned almost on both the years not only cost of debt is on the declining side but also interest rate also dipping downwards with 1.3% in 2008 and 3.2% in 2007, which reflects Target Corporation’s slight dependency on debt financing (Target Co., 2008-2007).

   Moreover, if the management of Target Corporation is wiling to build another store, firstly the management should look after its financing modes like equity or debt financing and according to the decision the management take the initiative to calculate the company’s WACC. In addition, to the WACC of the company the management also opts the WACC of 2008 because the WACC 6.4% of 2008 show the overall picture of the cost with respect to make investment in any feasible project.

Reference

Target Corporation. (2008). Annual Report.

Target Corporation. (2007). Annual Report.

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