Walgreens: the Corporate Financial Decision Making Analysis Essay

1092 Words Oct 23rd, 2008 5 Pages
Walgreens: The Corporate Financial Decision Making Analysis

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,
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To calculate my cost of capital and analyze the effects of the change of the cost of capital, will assume a 43% debt and 57% equity as the optimal capital structure and assuming that the debt-to-equity ratio equals 75%. Based on my assumptions, I have a total liabilities and shareholders’ equity of $19,432.53, where total debt is $8,355 and total equity is $11,077.53, representing the 43% and 57% respectively.

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
Re= 0.12
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

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