- What is cost of capital? What does it represent?
- Why is it important to estimate cost of capital?
- Is cost of capital set by investors or managers?
- How should Dale and Lee estimate the cost of long-term debt? Should short-term debt be considered in calculating cost of capital?
- How should Dale and Lee estimate the cost of equity?
a. Use dividend discount model to estimate cost of equity. Calculate growth rate using historical dividend growth rate and ROE*retention rate formula.
b. Use capital asset pricing model to estimate cost of equity.
c. Discuss which model is more appropriate in this case.
- How should Dale and Lee calculate the weights for debt and equity?
- Calculate Walmart’s cost of capital. How should Walmart use this number?
Sample Solution