Walgreens: the Corporate Financial Decision Making Analysis Essay
Walgreens’ principal activity is to operate a chain of retail drugstores that sells prescription and nonprescription drugs. The company also carries additional product lines like general merchandise including cosmetics, food, beverages and photofinishing. Walgreens is one of the fastest growing retailers in the United States and led the chain drugstore industry in retail sales and profits last year.
The capital structure of this retail drugstore is determined by 42,5% Debt and 57,50% Equity due to $8.239 of the total debt and $11,104,30 of Equity resulting in $19,313.60 of Total Liabilities and Shareholders’ Equity for 2007. Among the main debt-financing sources, …show more content…
If we are assuming a higher debt, which means that we will have an increase in interest expenses that will reduce our net earnings, hence I will have fewer shares and my earnings per share will be higher. Interest expenses also works as a tax shield letting the company to pay less taxes.
I will use the WACC formula to calculate Walgreens’ cost of capital based on 43/57 capital structure and using the assumption that the cost of equity is 12%.
E/V = 0.43
D/V = 0.57
Rd = 0.0536
Tc = 0.3599
All the information above was calculated based on the information available in the 2007 Walgreens Annual Report. The WACC is 0.712 which is 7.12%. Furthermore, using the Total Value of the Firm, the Equity, the Debt, and their respective costs along with the Corporate Tax Rate, I calculated the WACC of 7.12% for Walgreens. Hence, a WACC of 7.12% means Walgreens must earn a return of 7.12% on all its assets and business operations in order to maintain the current stock