Comp 3 = Fin Review Walmart's Financials and Business Model. Revised the attached paper with the requirments. Describe the business, including the type of business. Create the business case: ·

Walmart's Financials and Business Model – Comp 3

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Walmart's Financials and Business Model

Describe the business, including the type of business.

A retailing giant, Walmart personifies the essence of discount department stores and supercenters. It is a retail giant with a huge global footprint and a wide range of items, including groceries, electronics, clothing, and many others. Walmart operates in several formats, including a flagship Walmart store, Walmart supercenters, and the membership-based warehouse club named Sam's Club. The main focus of the business is, in turn, supplying customers with the lowest everyday prices, exploiting the economies of scale to keep its pricing competitive. Moreover, its massive supply chain and logistics network is heralding successful distribution, guaranteeing product availability and customer satisfaction. That is, Walmart represents an archetype of a retail giant, molding consumer conduct and market dynamics worldwide.

Create the business case

Determine why funding is needed for the company

Financing is critical for Walmart in order to drive multiple strategic actions and remain a leader in the competitive retail market. First of all, funding is a must in order to achieve growth goals through new stores and market opening, both domestically and globally. Moreover, the company is constantly introducing technological innovations as well as upgrading the infrastructure in order to improve online capabilities and make operations more efficient, which requires enormous capital expenditure (Vélez Berríos, 2020). Capital funding is vital for acquisitions and strategic partnerships, which allows Walmart to diversify its business and capture new growth areas. Besides, changing consumer behavior and dynamic market trends require a permanent allocation of funds to ensure the competitiveness of innovation and research initiatives. Lastly, the funds are like the oxygen of Walmart's expansion, equipping the company to remain adaptable, innovative, and successful despite economic fluctuations.

Walmart has several potential sources of funding, each with its requirements and associated risks:

• Self-Funding: Internally produced cash flows are a low-cost solution that can be achieved without debt or shareholder dilution. On the other hand, self-feeding could hinder growth and threaten liquidity, especially in scenarios when substantial investment requirements arise.

• Borrowing: Walmart can raise capital through obtaining loans or bonds by accessing debt markets. Although obtaining loans provides one with additional funds, it involves interest payments and the need to keep a healthy debt-to-equity ratio to avoid over-leveraging (Alam, 2016). Also, lenders may substantiate creditworthiness and financial stability by assessing collateral and credit ratings.

• Equity: Issuing additional shares of stock presents a funding option without incurring debt, but it reduces existing shareholders' ownership and can also lead to a loss of control if a significant amount of equity is issued.

• Venture Capital: For a company this size, it may be rare to get venture capital for a project dedicated to some innovation or technology. Yet, though venture capital can require a sacrifice of equity and may bring up the issue of conflicts of interest in relationships between investors and management.

Given that Walmart has strong cash flows and creditworthiness voted for, I would say that a combination of self-financing and borrowing is the most likely option. The self-sustained fund can take on day-to-day management and small projects, while borrowing can finance big-ticket projects without much foreclosure or dilution of ownership. This technique reconciles the conflicting demands for both capital and sound financial performance.

Below is an estimation of the cost of capital for short-term and long-term funding sources for Walmart:

Short-Term Funding: These loans are usually characterized by higher APRs because of the shorter time to be repaid and higher perceived risk. APRs for short-term loans for a company like Walmart may vary within the range of 3% to 7%, depending on the company's general economic conditions and credit rating. Although these credits provide capital swiftly, they incur higher interest rates.

Long-Term Funding: Long-term bonds, with their low APRs, are often associated with longer repayment terms and are perceived to be less risky and more attractive than short-term loans. The coupon rates for benchmark bonds will be around 2.5 to 4.5% for stable companies such as Walmart. Such bonds offer a large amount of capital, but at a minimal cost relative to other capital sources; therefore, they become more workable in matters of financing big projects and investments.

Below is a projected profit-and-loss statement for Walmart for a 3-year period:

Assumptions

• Revenue Growth Rate: 3% annually.

• Direct Costs: Assume 60% of revenue.

• Marketing Expenses: 2% of revenue.

• Labor Costs: 10% of revenue.

• Supply Costs: 20% of revenue.

Explanation

• Revenue increases by 3% annually, reflecting modest growth in Walmart's sales.

• Direct costs, including cost of goods sold, constitute 60% of revenue, reflecting standard retail margins.

• Marketing expenses are assumed to be 2% of revenue, representing ongoing promotional efforts.

• Labor costs are estimated at 10% of revenue, covering employee wages and benefits.

• Supply costs, encompassing procurement and logistics expenses, are set at 20% of revenue.

• Operating income is calculated by subtracting total operating expenses from revenue, reflecting Walmart's profitability before interest and taxes.

Estimation of direct costs for Walmart, including capital, marketing, labor, and supply costs

• Capital Costs involve investments in fixed assets like buildings, machines, and computer infrastructure technology. For Walmart, capital costs could be store remodels, technology upgrades, and investments in distribution centers (Batista, 2021). Let's calculate the capital costs to around 5% of revenue, which will be $27.5 billion for the first year.

• Marketing Costs: Walmart invests in numerous marketing campaigns that are designed to push their products as well as their brand. This comprises advertising campaigns, digital marketing, sponsorships, and events promotion. If we take the Marketing expenses as 2% of revenue, they would be $11 billion for the first year.

• Labor Costs: The different categories of labor costs are as follows: wages, salaries, benefits, and training costs of Walmart's huge number of employees. The labor costs, estimated at 10% of revenue, will total $55 billion for the first year.

• Supply Costs: The costs involved are the procurement of goods from suppliers, which includes transportation, warehouse, and inventory management. As Walmart is considered to have an efficient supply chain, the supply costs are likely to be approximately 20% of the revenue, a total of $110 billion being spent for the first year (Tien et al., 2019).

References

Alam, S. (2016). Financial analysis of retail business organization: a case of Wal-Mart Stores, Inc (Doctoral dissertation, UNIVERSIDAD DE EXTREMADURA).

Batista, R. A. F. (2021). Equity Research: Walmart Inc (Doctoral dissertation, Universidade de Lisboa (Portugal)).

Tien, N. H., Anh, D. B. H., & Thuc, T. D. (2019). Global supply chain and logistics management.

Vélez Berríos, L. (2020). Walmart’s Successful Business Strategies Leading to Competitive Edge in the Retail Industry. Manufacturing Competitiveness;.