Costco Wholesale And Target Corporation Case Analysis

We choose Walmart, Costco Wholesale and Target Corporation in grocery retail industry to calculate their five-year residual income and analysis their operation conditions.
Frist of all, we found their net income and total shareholder’s equity from income statement and balance sheet from NASDAQ website, The Wall Street Journal website and PDF of their annual reports. Then, we try to find the cost of capital for each company in the matched year, but we failed. So we decided to calculate the cost of equity by ourselves. Since the three companies we choose are C corporations that pay dividend to their shareholders, we believe that the dividend capitalization model, which bases the cost of equity primarily on the dividends issued by a company, make more sense to us. There is a formula to calculate cost of equity from dividend capitalization model, which is cost of equity equal to dividends per share next year divided by current share price plus dividend growth rate.

We guess Walmart may use good hedge or interest swaps effectively. However, since Walmart’s net income decreased and its total shareholder’s equity kept stable, its residual income decreased. That looks reasonable. Although Walmart did not well these years, but its operation seems still steady.
As for Costco Wholesale, its cost of equity is medium high and fluctuated from 12.38% to 15.67%, and actually declined slightly, which is a good trend. Probably Costco Wholesale made better financial structure or get lower interest rate because of its increasing net income. Costco Wholesale’s total shareholder’s equity fluctuated year by year, but its net income increased steadily from 2012 to 2017, thus its residual income increased as a whole. We believe Costco Wholesale did a great job these