Discussion Replies 2 paragraphs each unit 4
A firm’s capital structure determines its actual cost of capital, which is a critical measure in its valuation.
Evaluate the capital structure of the two firms that you have chosen, as well as each firm’s riskiness. Discuss why the cost of capital must be used as the hurdle rate in all investment decisions.
Walmart Capital Structure
Walmart, has a capital funding with venture capital, self-funding, Equity, and Borrowing are four of the funding that are available to Walmart. These capital source help maintenance the prices, on what to spend, and what equities the company owns. Many of these source help the Walmart maintain it brand name, and are very challenging when you’re representing the low prices. Walmart has a brand name, and a high reputation to keep up.
Capital Structure history:
1. Walmart’s total capital last quarter was 157.8 billion.
2. Walmart’s total capital for fiscal years ending January 2019 to 2023 averaged 147.9 billion.
3. Walmart’s operated at median total capital of 150.3 billion from fiscal years ending January 2019 to 2023.
4. Walmart’s total capital peaked in October 2023 at 157.8 billion.
5. Walmart’s total capital hit its 5-year low in January 2019 of 138.1 billion.
6. Walmart’s total capital decreased in 2021 (151.2 billion, -2.3%).
7. Walmart in 2022 (150.3 billion, -0.6%), and 2023 (145 billion, -3.5%) and increased in 2019 (138.1 billion, +8.3%) and 2020 (154.7 billion, +12.0%).
If, Walmart ever runs into a situation where the debt equity level is low, then Walmart will borrow money having a new debt. This helps Walmart pay off old debt, and start any new debt with low-interest rates. Believe it or not, many companies use this strategy to keep a company running specially, during hard situations, and the downfall of a business not doing so good.
Amazon Capital Structure
Amazon analysis capital structure focuses on short-term loans, the loans are, borrows from financial institutions. Because, of Amazon sale to increase profit sells, these loans are paid back due to the profits of product sells.
Amazon is an international company that sells product at a very fast pace, specially, online. So, the money in coming fast making a speedy capital structure that is all the way running, and keeping prices lows, and high.
These capital structure funds are mix with prices that can pay back loans, and for equity gains of the Amazon company. These finances come at a risk for Amazon company or any company that are paying loans, and keep the business running debt free.
Refences
What Is Amazon’s Capital Structure?Published: December 25, 2023
https://www.google.com/urlsa=t&source=web&rct=j&op… capital structure/&ved=2ahUKEwiNgcShw4uEAxXjIkEHWSdATYQFnoECC4QAQ&usg=AOvVaw1tLdngOn_Bj3dlclmA5S1f
Response Leigh Anne Voss:
Good evening, class, and Professor Miller,
The companies I have chosen, 2U Inc. and Coursera, operate from differing capital structure models, which is evident through their ratio analysis but has not been adequately understood until now. A Capital Structure is the company’s means of funding operations by leveraging its debt and equity. Varying dynamics unique to each company determine their actual cost of capital, which impacts stock deliverables and derivatives for investors as stakeholder beneficiaries for either debt or equity (Vipond, n.d.).
Different risks are associated with these decisions; for example, 2U Inc. has precariously positioned itself as its debt-to-income (D/E) ratio explains its high borrowing rate to cover liabilities. In this instance, their risk is more significant than their return. However, parent companies generally expect a higher amount of debt, and their ability to balance it within their cost structure seems skewed in a specific direction. In their 2022 financial statement, 2U was allotted 200M shares of common stock and reserved 28M for future issuance. Following their decision to sell 6.8M shares in 2020, this recapitalization strategy shows their decision to issue equity by selling new shares and earning funding for debt repayment (2U Inc., 2022).
Alternatively, Coursera, which has only recently reached its initial public offering (IPO), has controlled its debt retention in a more balanced manner as its D/E ratio expresses its limited borrowing from the market. This is important to note as their marketability for common stock has not yet been realized. In their 2021 financial statement, their common stock was substantial for issuance, with 119M total shares reserved, with their preferred stock converted into a contributing 75M of common stock. Additionally, their net loss per share was significant, further emphasizing their market position (Coursera Inc., 2021). These factors combined express their intent to issue debt and repurchase equity to establish a post-IPO operations baseline.
Investors and stakeholders depend on operational decisions, affecting the weighted average cost of capital (WACC). This minimum rate of return or hurdle rate considers risk premium, inflation rate, and interest rate; this benchmark identifies a company’s standing in their industry, which is imperative for investors to evaluate such risk (CFI Team, n.d.). While debt investors assume a low risk and equity investors agree to a higher risk, the cost of capital is subject to change, so the hurdle rate should use the WACC to value the firm’s cost of capital (Vipond, n.d.).
References:
2U. (2022). United States Securities and Exchange Commission: Form 10-K. Retrieved from: https://s26.q4cdn.com/441000616/files/doc_financials/2022/ar/414834-1-_5_2U_AR_WR.pdf
CFI Team. (n.d.). Hurdle rate definition: What is a Hurdle Rate? Retrieved from: https://corporatefinanceinstitute.com/resources/valuation/hurdle-rate-definition/
Coursera. (2022). United States Securities and Exchange Commission: Form 10-K. Retrieved from: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001651562/33003603-ab22-428e-8039-ce7e487bdbd9.pdf
Vipond, T. (n.d.). Capital Structure: Financing assets with debt and equity. Retrieved from: https://corporatefinanceinstitute.com/resources/accounting/capital-structure-overview/
Response to Robert to my Original post:
Jami,
Absolutely, the cost of capital is a crucial concept in corporate finance. It serves as a benchmark for evaluating potential investments and projects, helping companies make informed decisions that are aligned with the expectations of their investors. By comparing the expected returns of a project to the cost of capital, companies can determine whether the investment is likely to be profitable and whether it meets the required rate of return. This ensures that resources are allocated efficiently and that the company is pursuing value-maximizing opportunities. Additionally, by using the cost of capital to guide investment decisions, companies can demonstrate their commitment to creating shareholder value and maintaining financial discipline.
Response to Professor James Miller to my original Post:
Jami: From and investors point of view risk is always a major factor.
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