Value Walmart

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Valuing Walmart

Author: Austin Bogus Jarrod Fenstermacher Remi Omisore

For Review: Professor Gurdip S. Bakshi

“We, the aforementioned team, pledge on our honor that we have not given or received any unauthorized assistance on this assignment.” - University of Maryland Honor Pledge

September 24, 2012

Case Three
3.1 Question One

As of February 2010, what is your assessment of the worth of Walmarts stock? Utilize all of the methods discussed in the case to value the shares, including the following: • The perpetual growth in dividends • Forecasted dividends for the next several years plus sale of the stock in the future • The three-stage dividend model • The price/earnings approach

3.1.1

The perpetual growth in dividends

The standard method of finding stock price for perpetual dividends for a firm, given the firms dividend one year into the future and an expected growth rate for the dividend, is as follows: P0 = D1 (Ke − g)

where Ke is the investors’ required return, D1 is next year’s dividend and g is the expected growth rate of the dividend. However, since Walmart is being examined, and it is safe to consider Walmart in a steady state, it makes sense to use a slight variation to this formulation. P0 = E1 × p (Ke − g) g = (1 − p) × Ke

where E1 is the earnings 1 year into the future, and p is the payout ratio or the percentage of earnings paid in dividends. For this calculation an estimated earnings per share for the following year was found to be $4.11. This is the 2010 earnings per share of $3.72 increased by the quoted 10.4% (which is also roughly the growth rate over the last 6 years). If the 1

arithmetic average of the dividend payout ratio is taken over the life of Walmart, it comes to 14.4%, therefore this will be used in the calculation of P0 . P0 = E1 × p Ke × (1 − (1 − p)) $4.11 × 14.4% = 7.0% × 14.4% = $58.77

(3.1)

3.1.2

Forecasted dividends for the next several years plus sale of the stock in the future...
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