MSN Moneycentral (2011), the Beta for Wal-Mart Essay

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MSN Moneycentral (2011), the beta for Wal-Mart (WMT) is 0.33. This indicates that the company has a very low degree of correlation with the broader market, and is a less volatile investment than the broad market.

According to Yahoo! Finance (2011), the rate of return on a one-year U.S. Treasury bond is 0.318%. It is assumed that the market risk premium is 7%. This assumption means that the market rate of return is traditionally 7.318%.

The cost of equity for Wal-Mart is therefore as follows:

Rj = RF + ?j [RM - RF]

Rj = 0.318 + 0.33 (7)

Rj = 0.318 + 2.31

Rj = 2.628%

The cost of equity is lower than I had expected. Wal-Mart is a more stable company than I had thought. The beta is very low, indicating that Wal-Mart does not have much volatility. Most companies, especially retailers, struggled during the past recession and I would have thought that this would affect Wal-Mart as much as any other company, but apparently Wal-Mart performed well during much of the recession, as supplemental research points out (LaMotta, 2009).

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Knowing this, it is not a surprise that Wal-Mart has a cost of equity much lower than the average firm. Being as successful as it is, and operating in both major Western markets and in China, Wal-Mart is evidently well insulated from financial crises. Thus, it makes sense that Wal-Mart has a lower cost of equity than most other companies.

3. Some of the other companies that can be compared to Wal-Mart are Target (TGT), Costco (COST) and Amazon (AMZN), each of which is a major competitor for one of Wal-Mart's businesses. According to MSN Moneycentral (2011), Target has a beta of 0.93; Costco has a beta of 0.76 and Amazon has a beta of 1.16. Each of these companies has a higher cost of equity than Wal-Mart, because of these higher betas. This is logical. Wal-Mart is a….....

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