Week 51

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Egerton University *

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AP113/3054

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Finance

Date

Nov 24, 2024

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docx

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4

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Week 5: Business Case for Walmart's Funding Introduction: Walmart is a multinational retail firm that owns and manages a global chain of hypermarkets, cheap department stores, and grocery shops. Walmart is one of the world's largest retailers, with approximately 11,300 shops in 27 countries. Walmart must spend in its operations and strategic expansion in order to preserve its leadership position in the retail business. As a result, the purpose of this business case is to identify the causes for Walmart's financial needs, identify the relevant funding sources, evaluate the requirements of each funding source, examine the related risks, and select the best funding solutions for Walmart. Reasons for Funding: Walmart's finance requirements are driven by a variety of variables, including expansion goals, operational improvements, and technological advancements. Thus, to meet the increased demand for online shopping, Walmart plans to expand its reach by building additional shops in underserved locations and improving its e-commerce capabilities. In addition, in order to enhance efficiency and minimize costs, Walmart must invest in its supply chain and logistics. Finally, in order to increase its digital presence and provide customers with a smooth shopping experience, Walmart must invest in technology. All of these characteristics necessitate significant financial investments, which Walmart may fund through a variety of means. Sources of Funding: Walmart has numerous funding options, including self-funding, borrowing, equity, venture capital, and corporate bonds. Self-funding entails leveraging the company's income or reserves to support its expansion goals. Walmart has a strong cash flow and a strong balance sheet, making it a good candidate for self-funding. However, self-funding might restrict the
company's development potential, and given Walmart's aggressive expansion goals, it may not be the greatest option. Borrowing entails borrowing money from banks or other financial entities. Walmart has an excellent credit rating, which makes it simpler for the corporation to get loans at low interest rates. Borrowing, on the other hand, carries the danger of loan default, which can result in fines and legal action. Furthermore, loan interest payments might have an influence on the company's profitability. In exchange for capital, equity financing entails issuing new shares of the firm to investors. The approach is appropriate for businesses that want to develop quickly but lack enough capital reserves. However, equity funding dilutes current shareholders' ownership, and they may lose control of the company's decision-making process. Raising funds from investors ready to take on larger risks in exchange for potentially big returns is what venture capital is all about. The option in question is appropriate for startups or early-stage businesses that have creative ideas but little income or profit. However, there is a danger of losing control of the company's ownership and decision-making with venture capital. Corporate bonds are issued to investors who are ready to lend money to the firm in exchange for interest payments. Thus, this option is appropriate for well-established businesses with a solid credit rating and consistent cash flows. However, corporate bonds carry the danger of interest payment default, which might result in a decrease in the company's credit rating and legal action. Analysis of Funding Sources: After weighing the criteria and hazards of each funding source, it is clear that borrowing and corporate bonds are Walmart's best alternatives. Walmart has an excellent credit rating and strong cash flows, which makes it simpler for the corporation to get loans at cheap interest rates. Additionally, issuing corporate bonds can offer the required money while avoiding the danger of
losing control over the company's ownership and decision-making. However, before making a final choice, Walmart must analyze the risks associated with each funding source. Risks of Funding Sources: Borrowing carries the danger of loan default, which can result in fines and legal action. Before incurring any debt, Walmart must carefully analyze its capacity to repay the debts. Also, loan interest payments can have an influence on the company's profitability, therefore Walmart must guarantee that the interest rates on the loans are fair and sustainable. Corporate bonds additionally come with the risk of interest payment default, which might result in a deterioration in the company's credit rating and legal action. Before issuing any bonds, Walmart must carefully analyze its capacity to repay the interest payments. Further, corporate bond interest rates might change depending on market conditions, and Walmart must guarantee that the interest rates are competitive and sustainable. Deciding on the Best Funding Options: Walmart's best funding alternatives, after considering the requirements and associated risks of each funding source, are borrowing and corporate bonds. Walmart must guarantee that the interest rates on loans and corporate bonds are attractive and sustainable. Moreover, before incurring debt or issuing bonds, Walmart must analyze its capacity to service the loans and interest payments. Walmart's cash flow and balance sheet are strong, making it simpler for the corporation to get low-interest loans and issue corporate bonds at competitive rates. Estimating the Cost of Capital: The Annual Percentage Rate (APR) can be used to determine the cost of capital for both short-term and long-term funding sources. The following are the current expected APRs for borrowing and corporate bonds:
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Borrowing: Depending on the loan amount, period, and interest rate, the current APR for borrowing runs from 2.5% to 7%. Walmart's strong cash flows and solid credit rating might help the corporation acquire loans at lower interest rates, ranging from 2.5% to 4%. Corporate bonds now have an APR ranging from 2.5% to 5%, depending on bond maturity, interest rate, and market circumstances. Walmart's strong credit rating and consistent cash flows may enable the corporation to issue corporate bonds at lower interest rates, ranging from 2.5% to 3%. Table; Funding Source APR Range Short-Term Funding 2.5% - 7% Borrowing 2.5% - 4% Line of Credit 4% - 7% Commercial Paper 3% - 5% Long-Term Funding 2.5% - 5% Corporate Bonds 2.5% - 3% Term Loans 3% - 5%