Assessment of Wal-Mart valuation using different methods To test the assumption of a discount rate of 7% as given in the outline of the case, we calculated the required rate of return for the Wal-Mart stock using CAPM . Using rWalMart = Rf + βWalMart [E(RM) – RF], we find the required rate of return to be 7.01% and in line with the information given in the case outline. Perpetual dividend growth model: The standard method of calculating a stock price using the perpetual dividend growth model is done by assessing a company’s dividend one year into the future adding the future expected growth rate. The formula is written as: P0 = D1/(Ke − g), where Ke is the investor required return, D1 is next year’s dividend and g is the …show more content…
By calculating the dividend per share until D=3 and employing: P0 = D1/(1+Ke)^1 + D2/(1+Ke)^2 + D3/(1+Ke)^3+TV/(1+Ke)^3, where TV is the terminal value we calculate the present day intrinsic value of the Wal-Mart stock to be $62.15 hence the market value is consider low compared to our forecasted value. This method replicates the basic foundation of the Discount Cash flow Model (DCF), which in our opinion is the preferred method in valuation studies. Three-Stage Approach: There are no questions about this approach in the outline of the assignment, so the following comments should be considered “back of an envelope” considerations. In general the three-stage approach allows us to add complexity to the standard dividend discount models by enabling changing growth scenarios throughout the forecasting period: an initial period of higher than normal growth, a transition/consolidation period of declining growth and final a period of stable growth. The main assumptions are that the company on which we conduct the calculation study currently is in extraordinary strong growth phase. The time period with the extraordinary strong growth must be strictly defined and eventually be replaced with the declining growth assumption. Lastly, Capital Expenditures and Depreciation are expected to grow at the same rate as revenues. . Analyzing exhibit 4 we see a
The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229
* Utilizing the constant growth dividend discount model (DDM), the value of Wal-Mart’s stock price is $60.20. The most recent closing price of Wal-Mart stock was $53.48. Given this information, the constant growth DDM valuation suggests that the Wal-Mart stock is currently undervalued.
This model is easy to understand Myer’s business conditions. However, this is affected by dividends too much and dividends are not always linking the value creation , the valuation model seems
In Robert Greenwald’s 2005 film, Walmart: The High Cost of Low Price, he along with other political activist opposes the rhetoric of Walmart’s CEO, Lee Scott, to the experiences of current Walmart employees, both in the United States and internationally; small town business owners, shoppers, and community activists. The film opens up previewing an audience of Walmart employees at a convention cheering on Lee Scott as he proudly states “It would be a pleasure for anybody to be the CEO of this company. . . . You get to say we had record sales, we had record earnings, we had record reinvestment back in our company” (Greenwald, 2005, 0:50). The statement gave the impression that he was going to praise the work of employees for their contribution
The Debt to Equity ratio of Wal-Mart was relatively stable by comparing with the Debt to Equity ratio of Target Corp. The Debt to Equity ratio of Wal-Mart ranged from 0.46 to 0.57. Wal-Mart has the highest point at 0.57 in fiscal 2006 and the lowest point at 0.46 in fiscal 2004. The D/E ratio of Wal-Mart shows that Wal-Mart depends more on equity financing rather than the debt financing. The reasonable debt structure made Wal-Mart maintained at a lower level of D/E ratio than the industry level.
For Wal-Mart, the expected dividends are $1.09 per share with an expected rate of return at 21%, and an expected stock value of $60.67, Wal-Mart’s intrinsic value is $51.04. Based on the intrinsic value of Wal-Mart’s common stock price, the corporation’s common stocks are under-evaluated by 1.49% or $0.76 per share. More evaluations need to be made before concluding the proper stock price for Wal-Mart, Inc.
For this assignment, I select Wal-Mart Stores, Inc. Wal-Mart is an American public corporation that runs a chain of large discount department stores and a chain of warehouse stores. Wal-Mart operates more than 8,692 retail units across three business segments of retail stores worldwide that offer a wide array of general merchandise including groceries, apparel, electronics, and small appliances. In addition, the company is the world's largest retailer and grocery chain by sales and just over half of the company's sales comes from grocery items. Over 54% of the company's stores are located in the United States, with the majority
1Analysts typically forecast EPS going out for 5 years, which is about as far as analysts think forecasts are useful for most investors. For purposes of the DCF model, it would be better to have forecasts of the average growth rate in dividends going on out to perpetuity. However, (1) the analysts’ forecasts generally do represent their best guesses for the long-run growth rate, (2) in the long run,
For this part, I will used Dividend Valuation Model to estimate a fair value of Tesco’s Equity. This is because Tesco is supposed to pay out dividend every year, all things being equal. I will therefore adopt three assumptions from the study guides;
The provision of dividends is always associated with several problems in the process. Paying dividends regularly can easily lead to unrealistic expectations among the shareholders. Any irregularity in a dividend provision policy might raise issues of discontent among the investors or parties dependent on it, which results in the pressure on the company to maintain the dividends, such as the Linear Technology; they will have to maintain their policy of increasing the dividend’s percentage. Therefore, a company’s bad or poor performance that might affect the dividends is easily realized by the investors, which is disadvantageous for business.
Dividend policy remained an issue for many researchers of the finance field. The main question regarding the dividend policy is that whether it is the cause of variability in the prices of the stock or not? this question is still a mystery for the finance related researchers. Dividend can be simply defined as “the residual
Although Jonathan and Peter have been carried out the relationship between the dividend yield and the expected return, there is a general lack of research in the impact of different horizons on the return. This problem is that the correlation between variance horizons and the anticipated return, which is solved by Fama and French through a regression test:
Dividend policy is a major financial decision that a company has to make in order for the shareholders to be rewarded for their investment in the business. It is one of the most predictable and stable element of a firm. Most firms commence dividend payment when the firm matures because at such a period, the firm receives fewer opportunities to invest into in order to raise their capital. It is, therefore, imperative for the management of the company to know predict
The current valuation for the company is based on the DCF valuation model which assumes, valuation based a market risk-free rate of