Wal-Mart is the largest retailer in the world. Wal-Mart has more than 3800 stores in the United States and more than 2600 stores in the rest of the world. Wal-Mart is intending to expand its business operations by starting new business units in the USA. For this purpose, it is required to raise funds from various sources. There are various risks related to raising funds. The business has to ensure adequate cash flow to assure the smooth going of the new business. The risk related to the new business has to be carefully dealt with for assuring the viability of the expansion program. There are certain problems with raising the required funds. The company has to deal with all the capital budgeting issues carefully.
Capital budgeting is the most important and complicated problem of managerial decisions. It is concerned with designing and carrying out a systematic investment program. It is the process of deciding whether or not to commit resources to a project whose benefits would be spread over several periods. “A capital expenditure is an outlay of cash for a project that is expected to produce a cash inflow over a period exceeding one year.” (Capital budgeting, 2007).
The funding problems in the expansion program of Wal-Mart
The procurement of adequate capital resources for the expansion project of Wal-Mart is facing various issues. These include issues relating to risk, cost, politics, and public relations. To find out the optimum solution to these issues the company is required to prepare an estimated cash flow statement reflecting the financial viability of the expansion project.
There are certain risks related to the procurement of funds for the new business. The business has to ensure the economical source of fiancé for reducing the cash outflow in terms of interest payment. There are mainly two sources of fiancé for the new business; they are equity and debt. Equity capital introduction will face resistance from the existing stockholders of the company as it will lead to diluting their right over the company’s assets. The main benefit of equity capital is that there is no minimum restriction on the dividend payment. The debt fiancé will help the company to gain the benefit of trading on equity or financial leverage. There is only limited interest payment in case of debt fiancé and thus returns will exceed the interest payment; the balance will become assets of the equity shareholders. Optimum balance has to keep between the equity and debt finance.
b) Cost: Cost means the total amount of money, time, and resources connected with purchase or activity. The expansion project of Wal-Mart involves various types of start-up costs such as procurement of fixed assets, operating costs, etc. While selecting the source of finance, the company has to consider the cost of finance of each source. The cost of finance is an important element in the capital budgeting decision. “All lenders charge interest on their loans and this is the major element in the cost of finance.” (Arranging finance- the cost of finance, 2005).
The Company is required to pay interest and dividends on these sources of a fiancé. Thus the return from investment should be capable of repayment of the interest as well as assuring adequate dividends for the shareholders.
c) Politics (Getting it through committees):
Various committees influence the policies and decisions taken by managers in Wal-Mart. Thus, in the case of capital budgeting decisions, the managers have to approve the viability of the financial resources selected in producing desired returns. The fund resource selected by the company should be of optimum level, maintaining the risk at a minimum level.
d) Public relations: The Company has to consider the public relations issues while taking capital budgeting decisions. To influence the investors for assuring adequate finance, the company has to undertake various types of financial analysis for finding out the IRR and NPV of the expansion project. “In NPV capital budgeting, the decision-maker estimates the change to present and future cash flows that will result from a project and then discounts these changes against an IRR to determine if the NPV of the project is positive or negative. If it’s positive and capital is not rationed, the project should proceed.” (Capital budgeting and public relations, 2006).
Estimated Cash Flow statement
Estimation of the cash flows from the new unit is done through the preparation of an estimated cash flow statement.
Table 1. Estimated Cash flow Statement of Wal-Mart
|Particulars||Amount in $||Amount in $|
|Cash Outflow |
Fixed asset investment
Start up budget
Total Cash outflow ( a)
Loans and advances
Total cash inflow ( b)
Cash in hand ( b) – ( a)
The estimated cash flow statement over the expansion project of Wal-Mart reveals that there involves a net cash flow of $ 30000. For the long term fiancé, company adopts Equity and debt finance and for short term purpose, loans and advances from banks and other financial institutions are adopted. It is estimated that through the expanded business operations, Wal-Mart can attain net inflow of $ 30000 in the initial year. There involves potential opportunity for the business to attain market growth and profitability at an improved rate.
- Arranging finance- the cost of finance. (2005). The Move Channel.com.
- Capital budgeting and public relations. (2006). Hill& Knowlton.
- Capital budgeting. (2007). NetMBA: Business Knowledge Center. Web.