Wal Mart case assignment PDF

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WalMart Professor Bhattacharya Cases in Finance 31 March 2020 WalMart This case had many different options for valuing WalMart. We were tasked with finding a stock value as well as market value for WalMart under three pricing options: perpetual growth of dividends, forecasted dividends, and the price to earnings approach. Each valuation has several different results although they are not materially different. First, we looked at dividend growth. There were two steps in solving this. We knew we needed to utilize the CAPM formula in order to find missing variables in the dividend growth formula. The variables for this formula were given, and not much was assumed. Our calculated market value of the stock was $60.87 and our value for the company was $235,334,420.

Secondly, we analyzed WalMart using the forecasted dividends for the next several years approach. This formula required us to find the weighted average cost of capital (WACC) in order to solve it. Many of these variables are stated in the case, however, some were assumed or calculated based upon data in the case. When using WACC, it is crucial to find the percentages of debt and equity. First, we calculated the cost of debt. We did so by adding long-term debt and long-term obligations under capital leases. This is all the debt WalMart has outstanding, therefore, it is the cost of the debt. Then, we calculated the cost of equity by simply looking at WalMart’s 2010 stockholders’ equity. We then determined the percentage of debt and equity to be 33.29% and 66.71%, respectively. We also determined a tax rate to be 32.35% by dividing income tax by EBIT. With all our variables, we were able to calculate a WACC of 5.83%. After

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WalMart finding our WACC, then determined the average growth rate. For this, we assumed a growth rate to be 16.22%. This is an average of the last five years annual dividend growth. We believed that this was most accurate. Having this growth rate, we were able to project future dividends up until 2014. From here, we were able to calculate our terminal value in 2014 to be $97.83. We totaled our present values for each projection and took the net present value of them. By doing this, we arrived at an anticipated stock valuation of $79.97 and a market valuation of $309,148,740.

Finally, we utilized a price per earnings evaluation. All variables were present so there were no assumptions made. The industry P/E ratio was 14.23% and the earnings per share in 2010 is $3.71. Additionally, in 2010, WalMart had 3,886 shares outstanding. The projected stock price can be concluded by multiplying 14.23% and $3.71 to arrive at $52.76. The projected market value of WalMart can be concluded by multiplying shares outstanding by the projected stock value to arrive at $203,987,050.

There is a sheet in the Excel case which proved to be helpful when determining each value. There were a lot of assumptions made here such as discount rate (8%), growth rate (5%), growth years (5), and transition years (12). Each assumption, we felt, were reasonable. The one area that was grey were the growth and transition years. WalMart is such an established company, however, there is always time to grow and improve. We felt if we made it shorter, there would be something else changing such as increased expenses or potential misstatements on financials. When we calculated the stock valuation based on the above variables, we concluded WalMart to be $57.40. This is right in line with the other valuations, therefore, we knew our variables were very close to being correct.

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WalMart The case states that the analyst target price for Walmart was $60.50 per share with a recent closing price of $53.48. It also mentioned that the 52 week high and low were $55.01 and $46.42, respectively. Furthermore, Bloomberg analysts were advocates of labeling WalMart stock as a “buy” in the upcoming six to twelve months by 20 analysts, “hold” by seven analysts, and “sell” by none. This indicates that there are many analysts closely monitoring WalMart and are providing a very bullish outlook on the stock in the upcoming year or so. Throughout our calculations for valuing WalMart’s stock, we found that our estimates provided high valuations than the current price, more often than not. When using the constant dividend growth model, we calculated a share price of $60.87. After that, we forecasted future dividends and calculated a model that provided a value of $79.97 per share of WalMart stock. The third model that we used to calculate the share price for WalMart was the PE approach. When using this method, we found a value of $52.76 per share. Over our three evaluations of the share price, two provided estimates that share prices were expected to rise rather significantly and even exceed analyst estimates, and one indicated a slight dip in price. The expected growth of WalMart, our valuations of WalMart indicating that the shares are currently undervalued, and the bullish forecasts of analysts led us to believe that now would be a good time to recommend buying WalMart, if they are not already in a clients portfolio and are looking for a long term investment, shares to capitalize on a rise in share price down the road, and to recommend holding WalMart shares to clients who may already have them in their portfolios as they may experience capital gains. If clients are looking for long term capital appreciation, then this stock would be a great buy as it is expected to grow. However, for clients who are looking for a shorter-term investment, WalMart may not be in their best interest as the stock may take some time before it truly begins to rise. There are too many indicators pointing towards a rise in WalMart’s share price to consider selling the stock.

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WalMart Although it will likely experience volatility in the coming months or years, just like any other stock, it is highly expected to be a stock that continues to rise especially if held onto for the long run, as mentioned above. The same recommendation cannot be made for all clients because many, if not all, have different investment goals and horizons. For that reason, we recommend buying for long term investors, and holding for short term investors.

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