WACC Simulation Game – Walmart Expansion

Walmart is considering opening a new store near Jacksonville University. They need $300,000 to build it. To raise this, Walmart plans to:

This reflects a capital structure of 70% equity and 30% debt — a common conservative structure for large firms. Let’s calculate Walmart’s Weighted Average Cost of Capital (WACC) and explore how financing choices affect project feasibility.

🔧 Why Use Equity and Debt?

Equity is raised by selling new shares to investors. It’s more expensive because shareholders expect high returns due to risk. Common ways to estimate the cost of equity include:

CAPM (Capital Asset Pricing Model): Re = Risk-free rate + Beta × Market Risk Premium
Dividend Growth Model: Re = (D1 / (P0 − F)) + g, where F is the flotation cost

Debt is raised by issuing bonds. It’s cheaper because bondholders are paid fixed interest and interest is tax-deductible — this creates a tax shield. The cost of debt is often estimated using:

Yield to Maturity (YTM) on outstanding bonds

Don't forget: when issuing new equity, companies must subtract flotation costs (fees to underwriters, lawyers, etc.), which raise the effective cost of equity.

Companies aim to find an optimal capital structure — a balance of debt and equity that minimizes WACC and maximizes firm value. Many aim for 30–40% debt to maintain financial flexibility while taking advantage of the tax benefits of borrowing.

Also important: when using YTM to estimate the cost of debt, don't forget to subtract flotation costs from the bond issue price. Just like equity, issuing debt involves underwriting and legal fees that increase the real cost of capital to the company.

🏪 Walmart JU Expansion: WACC Teaching Game

🔧 Why Use Equity and Debt?

🔢 Capital Structure Inputs