Valuing Wal-Mart 2010

Valuing Wal-Mart 2010 Case Analysis
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Valuing Wal-Mart 2010 Case Analysis
Sabrina Gupta is an investment advisor deciding on whether to guide her customers to purchase Wal-Mart’s shares. In order to solve this problem, several valuation techniques, including dividend discount model (DDM), two-stage DDM, three-stage DDM, and price/earnings approach (Foerster, 2011).
Question 1
The Perpetual Growth in Dividends
The DDM technique is employed anchored on the following assumptions. First, Wal-Mart is experiencing a stable rate of growth. In other words, it is assumed that the dividend growth rate is perpetual. In addition, the company’s other performance (e.g., in terms of earnings) is also expected to grow at a similar rate. Second, the firm’s rate of growth should not surpass the cost of equity. The formula for stock value is D1/[k -g]. Executing the figures in this relations: $1.21/[6.99% - 5%] = $60.82. In this vein, $1.21 (consensual estimation from financial analysts) would be utilized when computing the expected dividend. Furthermore, the analysts’ anticipated constant share growth rate would be obtained, 5 percent.
Nevertheless, for the equity cost, the CAPM model is used to obtain the value. Regarding the risk-free rate, the long-term decade-long government securities yield is employed (i.e., 3.68 percent). Bloomberg’s 5.05 percent is used for the market risk premium. Moreover, Bloomberg’s adjusted beta (0.655) depicting the futuristic view is used. That said, the cost of equity is calculated at 6.99 percent. Overall, the DDM approach indicates that Wal-Mart’s share value is $60.82.
Forecasted dividends for the next several years plus the sale of the stock in the future
In the initial phase, it is assumed that the company’s dividend will continue to proliferate. The length of the second stage equals the next several years after the initial step. Within this phase, it is assumed that the dividend growth would be stable and lower.
DDM computation in the initial phase (the year 2011 to 2015)
Within this case, it is assumed that the first phase would range from five years. In 2011, $1.21 was the expected dividend projected by investment analysts. The earnings growth rate anticipated by investment analysts (10.40 percent) regarding growth rate is indicated in the calculation below.
Dividend = past year dividend*[1+earnings per share growth rate]. Therefore, EPS growth rate = 10.40 percent.
The expected dividend is $1.21, $1.33, $1.47, $1.62, and $1.79, for years 2011 to 2015 respectively. In this vein, it is possible to discount the respective amounts to determine the present value. Ultimately, the aggregate present value for the initial phase is $6.03.
DDM Computation during the Second Stage [years 2016 and onwards)
Stable growth rate = [1 – payout ratio]*equity cost.
= [1-45%]*6.91% = 3.8%
The payout ratio at maturity provided in the case (45 percent) is used. Concerning the cost of equity, CAPM is used. The inputs applied in CAPM constitute the similar ones employed within the CAPM equation within the DDM approach except for the beta. With regards to beta, the adjusted beta provided in the ...