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... These activities require substantial outlays of capital for expanding or building new stores, acquiring and holding inventories, and advertising and merchandising expenses
As we continue the evaluation of general merchandise retail companies, the following examines the capital structure of the three companies under study, retail giants Wal-Mart, Target, and K-Mart. The capital structure is the mixture of debt and equity that funds a company’s assets. ... It also looks at the financing of acquisitions, the implications for the companies, and offers recommendations for a better capital structure.
Financing Activities - Wal-Mart
Sources of Financing
The company’s immediate capital projects include leasing of lands and buildings for 10 future locations, and the building up of merchandising inventories (Wal-Mart 2003 Financial Report). ... 336%, making the effective rate for Wal-Mart’s notes 1. ...
Wal-Mart’s goal is to maintain a debt to total capitalization ratio of approximately 40% (Wal-Mart 2003 Financial Reports), meaning that 40% of its assets are funded by debt, and 60% by equity. ... 35 which is considered standard for the retail industry, indicates that Wal-Mart is using leverage more than expected to finance operations. ...
Since financial leverage does not generally affect the value of a firm, or its cost of capital, the primary impact remains the change in return on investments and equity, and from the numbers in Table 1, Wal-Mart’s use of financing by debt in this scenario results in higher returns on equity for shareholders. To balance efficient use of leverage and maintenance of appropriate debt levels, it is recommended that Wal-Mart continue to maintain its debt to total capitalization ratio of 40%, but not to exceed this number.
Wal-Mart should also continue using short-term notes, and refinancing debts when appropriate because interest rates are volatile, although, with interest rates at historical lows, use of long term debt such as bonds may be appropriate.
Approximate Word count = 1427
Approximate Pages = 5.7
(250 words per page double spaced)
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