Financial Institutions and Debt Capstone Project

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Kohls Corp

Kohls is a well-known department store with a head office based in Wisconsin (Kohls, 2016). To assess the financial performance of the organisation, including its cost of capital, the latest set of available accounts were utilise, this was the 10k issued in 2016, four financial year ending 31 December 2015 (Kohls, 2016). The paper starts by examining the cost of capital for the organisation, and then considers the value of its operations.

Cost of Capital

Capital within any organisation is made up of two elements; debt and equity. Debt consists of money that has been borrowed from third parties, which will need to be repaid (Howells and Bain, 2007). Debt may be short or long-term, with the borrower paying interest and/or fees for the use of money from a third party (Elliott and Elliott, 2015). Generally, the higher the level of proportional debt carried by phone, the greater the perceived level of risk on the part of the shareholders (Bodie, Kane and Marcus, 2014). At Kohls at the end of the 2015 the total level of debt was $8,115 million. While there is no full breakdown on the levels of interest payable, a calculation can be undertaken to assess the amount of interest paid by dividing the interest shown on the income statement, by the outstanding amount of debt. As shown in figure 1, this equates to an annual interest rate of 4.03%, which can be seen as the cost of debt (Elliott and Elliott, 2015).

Equity is money invested by the shareholders, and funds that are created and generated by the firm and retained in the business (Howells and Bain, 2007).

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This is money that does not need to be repaid. In 2015 this amount $5,491 million. However, just because it does not need to be repaid does not mean it comes about a cost. Shareholders make investments in order to gain returns, and in the case of Kohls, there is a payment of dividends. Therefore, by dividing the dividends made by the equity outstanding, it is possible to calculate a cost of equity, which is 6.36% as shown in table 1 below.

With the cost of debt and the cost of equity it is possible to calculate a weighted average cost of capital, by calculating the proportion of each form of capital, and then allocating a proportional level of that interest in order to gain a weighted average cost of capital (Elliott and Elliott, 2015).

Table 1; weighted average cost of capital

Amount outstanding

Payments made

Payments as % of that capital

Proportion of total capital

Proportion of interest

Debt

4.03%

0.596428

2.40%

Equity

6.36%

0.403572

2.57%

Total

13606

4.97%

By taking the proportional levels of interest for each type of capital, the above calculation shows that the weighted average cost of capital for Kohls for the financial year 2005 was 4.97%.

Value of Operations

However, while the weighted average cost of capital may be an indicator of the perceived risk associated with a firm, as higher returns required by both lenders and investors will include a risk premium (Nellis and Parker, 2006), investors are likely to be more interested in the actual performance of the firm. The primary performance measures are usually.....

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