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Target Corp. Weighted Average Cost of Capital

In: Business and Management

Submitted By nbit589
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Pages 9
The purpose of this memo is to provide Target Corp. senior management with an evaluation of the company’s weighted average cost of capital (WACC). Since the 2010 financial information is not yet to be finalized, the analysis will use the most currently published financial data to evaluate each component of the WACC, including the company financial structure, cost of debt, and cost of equity. I. Target Corp. Financial Structure
According to the consolidated balance sheet on January 30, 2010 (exhibit 1), the total amount of debt, including short-term and long-term debts and other current liabilities was at $16.814 billion. Account Payable is excluded from the WACC’s debt component because it is not a source of funding that comes from investors. Also in January 30, 2010, Target‘s market capitalization was at $36.176 billion (708.08 million shares at $51.09/share). As a result, the company was financed with 31.7% debt and 68.3% equity. II. Cost of Debt
A close estimate for the cost of debt would be the yield to maturity of Target’s corporate bonds because it reflects the expected return of debt holders from investing in this type of corporate security. Exhibit 4 lists several Target corporate bonds with similar term length and slightly different time of issuance. For this analysis, I used the average yield to maturity of 5.06% as an appropriate estimate of the borrowing rate. III. Cost of Equity
The analysis used the CAPM model to determine the cost of equity. * Risk-free rate: For the purpose of this analysis, I chose the 10-year bond with a current yield of 3.39% (exhibit 2) because it would likely match the horizon of our future projects, thus make it more appropriate for valuation. * Equity Market Risk Premium: According to the stock and market data from Exhibit 3, the average annual return of S&P 500 over the period from 1928 – 2010 is

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