The Cost of Capital of Grocery Firms and Agribusiness

The goal of this case study is to explore the complexities and relevance of accurately estimating the cost of capital, which serves as a reference for key decisions in corporate finance and equity valuation. A company’s cost of capital is not directly observable and must be estimated. Despite the simplicity of a company’s cost of capital formula, estimating the cost of capital is not simple because it requires a fair amount of judgment. The case, designed for agribusiness finance and financial management courses, is about major firms in the U.S. grocery store sector (including Walmart, Kroger, Albertsons, Costco, and Publix), which is the largest food retail channel. The case summarizes and discusses findings mainly from three studies that surveyed financial managers on their cost of capital estimation practices. This discussion highlights the lack of consensus on several aspects of cost of capital estimation and underscores the importance of making informed judgments based on finance and economics principles. The case study provides enough historical and recent financial statements and market data to estimate the cost of capital of grocery store firms. It also suggests a series of questions aiming to achieve the case’s learning objectives.