Executive Summary

March 02, 2026

Analysis of the cost of capital and financial structure in Brazilian retail

Gileade dos Santos Souza; Oldack Elias Conde Jaoude

Summary prepared by the ResumeAI tool, an artificial intelligence solution developed by the Pecege Institute focused on synthesis and writing.

This study analyzes the calculation of the cost of capital in the Brazilian retail sector, evaluating the capital structure, the Weighted Average Cost of Capital (WACC), and the risk and return of representative companies listed on the B3. The research highlights how different compositions between equity and debt influence the cost of financing and the market’s perception of risk, providing an empirical overview of strategic financial decisions in one of the economy’s most relevant sectors. The analysis of these variables allows for an understanding of the challenges and strategies companies employ to optimize their resource allocation and maximize shareholder value.

The retail sector in Brazil is a pillar of economic activity and a thermometer of consumption, credit, and confidence. Recently, the segment faced a challenging macroeconomic scenario, with high interest rates, credit restriction, inflationary pressures, and the digitalization of consumption. This context intensifies pressure on financial management, making efficient capital administration indispensable for survival and growth. A company’s ability to finance its operations at a competitive cost is a crucial strategic differentiator (Assaf Neto & Lima, 2017).

In this environment, the cost of capital is a fundamental financial metric for decision-making. It represents the minimum rate of return that an investment must generate to be viable, reflecting the opportunity cost of creditors’ and shareholders’ resources (Damodaran, 2012). The Weighted Average Cost of Capital (WACC) is the consolidated tool for measuring this rate, as it integrates the cost of debt capital (debt) and equity capital (shareholders’ resources), weighted by their participation in the financing structure. An accurate calculation of WACC is essential for project evaluation, setting profitability targets, and formulating value creation strategies (Assaf Neto, 2020).

Financial literature extensively debates capital structure and its influence on firm value. The works of Modigliani and Miller (1958, 1963) established that, in a perfect market, capital structure is irrelevant, but the introduction of imperfections such as taxes creates a tax benefit for debt. Subsequent theories, such as the trade-off theory and the pecking order theory (Myers, 1984), explain financing decisions as a trade-off between the tax benefits of debt and the costs of financial distress and agency problems (Jensen & Meckling, 1976). In the Brazilian context, high volatility and historical interest rates add complexity to this decision, making empirical analysis more relevant (Eid Junior, 1996).

Despite the theoretical foundation, there is a gap in applied studies that comparatively investigate financing strategies and their impacts on the cost of capital of large retailers in Brazil during a recent period of macroeconomic tension. The heterogeneity in debt structure can significantly impact the cost of capital, requiring a contextualized analysis (Eça & Albanez, 2022). This study seeks to fill part of this gap, with a quantitative and comparative analysis that calculates the WACC and discusses the strategic implications of different capital structures, contributing to the understanding of the sector’s financial dynamics.

The research has an applied, quantitative, and descriptive approach, using secondary data from public sources, such as financial statements and reports from companies in the retail sector on B3. The temporal scope focuses on the first quarter of 2025 (1Q25), a period characterized by a restrictive monetary policy in Brazil, with a high interest rate, which makes the analysis of the cost of debt and capital particularly relevant.

The sample was composed of three representative companies of Brazilian retail: Magazine Luiza, Lojas Renner, and Via Varejo. The selection was intentional, based on criteria of market relevance, stock liquidity, and availability of complete and audited financial information. The data were collected from the companies’ investor relations platforms and the system of the Securities and Exchange Commission (CVM), ensuring the reliability of the information.

The analytical procedure was structured in four steps. First, the capital structure of each company was analyzed, calculating the participation of third-party capital and equity. Next, the WACC was calculated for each company. The cost of debt (Ki) was determined from the effective interest rates reported, adjusted for the tax benefit. The cost of equity (Ke) was estimated by the CAPM model (Sharpe, 1964), using parameters such as the risk-free rate, the market risk premium, and the beta coefficient of each stock.

The fourth stage consisted of a comparative analysis of the risk-return relationship, contextualizing the WACC results with the historical volatility of stocks and shareholder returns. This integrated methodological approach is widely accepted in corporate finance practice (Ross, 1977) and allows for the construction of an analytical narrative about financial strategies and their consequences. The combination of capital structure analysis, WACC calculation, and risk-return assessment offers a robust view of the determinants of the cost of capital in the sector.

The analysis of the results reveals distinct financing strategies and capital cost profiles. Lojas Renner presented the most conservative structure, with indebtedness of only 16.59% of its total capital structure in Q1 25, demonstrating a preference for equity financing (83.41%). This low leverage is reflected in a cost of debt (Ki) of 8.267% per year and a cost of equity (Ke) of 17.657%, the lowest among the three. The result is a WACC of 15.93% per year, the lowest in the sample, indicating that the company needs a lower rate of return on its projects to generate value.

Lojas Renner’s conservative strategy signals lower exposure to financial risk, reducing vulnerability to interest rate shocks and providing greater stability. This perception of lower risk justifies the lower cost of equity capital, as shareholders demand a smaller risk premium (Fama & French, 2002). Although this structure may limit leverage to accelerate growth, it provides resilience during periods of uncertainty. The WACC of 15.93% serves as a rigorous internal benchmark for approving new investments.

In an intermediate position, Magazine Luiza exhibited a capital structure with 52.93% third-party capital and 47.07% own capital. This composition suggests a strategy that seeks the benefits of debt without incurring excessive levels. The company’s cost of debt (Ki) was 11.4582% per year. The effective income tax rate of 0% in the period eliminated the tax benefit of debt, impacting the WACC calculation, which resulted in 17.7% per year. Magazine Luiza’s risk profile is perceived as higher, which is reflected in a cost of own capital (Ke) of 24.697%. This value reflects greater financial leverage and exposure to more volatile retail segments. The WACC of 17.7% establishes a higher return barrier, indicating a strategy of accepting a higher cost of capital in exchange for flexibility to finance expansion and investments.

Via Varejo presented the most leveraged profile, with 67.61% of its capital structure composed of third-party resources. This high dependence on debt translates into the group’s highest fundraising cost (Ki), at 14.22% per year. The associated financial risk is priced by shareholders, who demand a high return, resulting in an estimated cost of equity (Ke) of 36.1%, the highest in the sample. The combination of these factors culminated in a WACC of 19.34% per year, higher than that of its competitors. Via Varejo’s high leverage strategy imposes great pressure on management. A WACC of 19.34% means that any new project must present an expected return above this level to be viable, which can become an obstacle to sustainable growth. The analysis highlights the trade-off: leverage can amplify returns, but it also magnifies losses and increases the cost of capital when perceived risk rises, corroborating the trade-off theory of capital structure (Myers, 1984).

The comparison of results consolidates the thesis that capital structure is a primary determinant of the cost of capital in the Brazilian retail sector. A positive relationship is observed between the level of indebtedness and WACC: Lojas Renner, with the lowest leverage (16.59%), has the lowest WACC (15.93%); Magazine Luiza, with intermediate leverage (52.93%), has an intermediate WACC (17.7%); and Via Varejo, with the highest leverage (67.61%), bears the highest WACC (19.34%). This progression demonstrates how financing decisions are reflected in the minimum required rate of return. This dynamic reinforces the importance of WACC as a strategic management tool. Companies with lower WACC, such as Lojas Renner, have a competitive advantage, as they can invest in projects with more modest returns and still create value. Conversely, companies with high WACC, such as Via Varejo, face the challenge of finding opportunities that exceed their high cost of capital. Capital structure management is a strategic choice that shapes the organization’s growth opportunities and resilience (Eid Junior, 1996; Assaf Neto, 2020).

The research demonstrated that the financing structure adopted by retail companies has a direct impact on WACC. The results showed different positions: Lojas Renner adopts a conservative stance, with low debt and lower cost of capital; Magazine Luiza seeks a balance; and Via Varejo operates with high leverage, resulting in a substantially higher cost of capital. The differences confirm that capital structure management is a critical decision that influences the minimum rate of return required for new investments and value creation capacity. The study reinforces WACC as a central indicator for decision-making, synthesizing the opportunity cost of capital.

The work contributes to the literature with an empirical and comparative analysis applied to the recent context of Brazilian retail, offering subsidies for managers, analysts, and investors. The study’s limitations include the temporal scope focused on a single quarter and the reduced number of companies in the sample. Future research could expand the analysis to a longer period, in order to capture effects of different economic cycles, and include a broader sample. The incorporation of macroeconomic and corporate governance variables could enrich the understanding of the determinants of the cost of capital. It is concluded that the objective was achieved: it was demonstrated that the capital structure adopted by Brazilian retail companies directly impacts the calculation of their cost of capital, with more leveraged structures resulting in a significantly higher WACC.

References:
Assaf Neto, A. 2020. Corporate Finance and Value. 8th ed. Atlas Publishing House, São Paulo, SP, Brazil.
Assaf Neto, A.; Lima, F. G. 2017. Course of Financial Administration. 3rd ed. Atlas, São Paulo, SP, Brazil.
Damodaran, A. 2012. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. 3rd ed. John Wiley & Sons, Hoboken, NJ, USA.
Eça, J. P. A.; Albanez, T. 2022. Does the heterogeneity of debt structure reduce the cost of capital? Revista Contabilidade & Finanças (USP), v.33, n.89, p.7-25. São Paulo, SP, Brazil.
Eid Junior, W. 1996. Cost and capital structure: the behavior of Brazilian companies. RAE – Revista de Administração de Empresas, v.36, n.4, p.51-59. São Paulo, SP, Brazil.
Fama, E. F.; French, K. R. 2002. The equity premium. The Journal of Finance, v.57, n.2, p.637-659.
Jensen, M. C.; Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, v.3, n.4, p.305-360.
Modigliani, F.; Miller, M. H. 1958. The cost of capital, corporation finance and the theory of investment. The American economic review, v.48, n.3, p.261-297.
Modigliani, F.; Miller, M. H. 1963. Corporate income taxes and the cost of capital: a correction. The American economic review, v.53, n.3, p.433-443.
Myers, S. C. 1984. The capital structure puzzle. The journal of finance, v.39, n.3, p.574-592.
Ross, S. A. 1977. The determination of financial structure: the incentive-signalling approach. The Bell Journal of Economics, v.8, n.1, p.23-40.
Sharpe, W. F. 1964. Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, v.19, n.3, p.425-442.


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