Is Ulta Beauty Underleveraged? An Analysis of Equity Risk and Capital Structure Efficiency

Qingxi Cai

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.FINANCE

Faculty Research Mentor: Kakolyris, Andreas  

Abstract:

This study evaluates whether Ulta Beauty’s current capital structure is financially efficient by examining the relationship between leverage and equity risk. The objective is to determine how the change in financial leverage would influence the company’s beta, cost of equity, and overall cost of capital. Ulta Beauty is a U.S. beauty retailer offering cosmetics, skincare, and haircare products through stores and online shop. Our study estimates Ulta’s levered and unlevered beta through the Hamada equation and calculate firm’s cost of equity using the Capital Asset Pricing Model (CAPM) by using Bloomberg Terminal data. Additionally, a synthetic credit rating approach is applied to estimate the cost of debt and compute the weighted average cost of capital (WACC). Ulta Beauty currently has a very low debt ratio and strong interest coverage ratio (ICR), which indicates the firm conducts conservative financing strategy. Our analysis suggests that leverage contributes minimally to the firm’s equity risk under its current structure. This expected finding raises an important question: whether the company’s conservative financing policy leaves potential value? Our findings are presented and analyzed in this poster.