Financial Outcomes Paper
Capital Valuation Paper
University of Phoenix
FIN / 419 – Finance for Decision Making
November 3, 2009
Capital Valuation Paper
Companies are evaluated to determine if they are risky to invest in. There are many tools that are used to conduct this evaluation.
Part of determining Wal-mart’s financial health is to analyze their debt position. This is done by indicating the amount of other people’s money being used to generate profits. Long-term debts are also a factor of Wal-mart’s financial health. Long-term debt commits a company to a stream of contractual payments over a long period of time. For instance, the more debt Wa-lmart has, the greater the risk it is to pay back its contractual debt payments and perhaps becoming bankrupt. Shareholders often pay vey close attention to the company’s ability to payback their debt. The more debt a company uses creates greater financial leverage (Gitman, 2006).
The debt ratio demonstrates the proportion of total assets that the company has financed by creditors.According to Wal-mart’s annual balance sheet for the ending period of January 31, 2009 their total debt is $98,144,000, total assets $163,429,000(Yahoo, 2009). The equation for debt ratio is:
Debt ratio = Total Liabilities
Total Assets
The debt ratio for Walmart is
$98,144,000
$163,429,000 = 0.60 = 60%
This means that Walmart has financed more than half of its assets with debt. This is a high ratio, thus Walmart’s degree or indebtedness as well as its financial leverage is greater. Another debt ratio is the Times interest earned ratio which is earnings before interest and taxes / interest. The times interest earned ratio for Wal-Mart is $18,435,000 / $1,900,000 = 9.7. This looks good for Wal-Mart because a times interest earned ratio of 3 is decent and 5 is good.
In an effort to determine the real value of Wal-Mart common stock, multiple evaluation
University of Phoenix
FIN / 419 – Finance for Decision Making
November 3, 2009
Capital Valuation Paper
Companies are evaluated to determine if they are risky to invest in. There are many tools that are used to conduct this evaluation.
Part of determining Wal-mart’s financial health is to analyze their debt position. This is done by indicating the amount of other people’s money being used to generate profits. Long-term debts are also a factor of Wal-mart’s financial health. Long-term debt commits a company to a stream of contractual payments over a long period of time. For instance, the more debt Wa-lmart has, the greater the risk it is to pay back its contractual debt payments and perhaps becoming bankrupt. Shareholders often pay vey close attention to the company’s ability to payback their debt. The more debt a company uses creates greater financial leverage (Gitman, 2006).
The debt ratio demonstrates the proportion of total assets that the company has financed by creditors.According to Wal-mart’s annual balance sheet for the ending period of January 31, 2009 their total debt is $98,144,000, total assets $163,429,000(Yahoo, 2009). The equation for debt ratio is:
Debt ratio = Total Liabilities
Total Assets
The debt ratio for Walmart is
$98,144,000
$163,429,000 = 0.60 = 60%
This means that Walmart has financed more than half of its assets with debt. This is a high ratio, thus Walmart’s degree or indebtedness as well as its financial leverage is greater. Another debt ratio is the Times interest earned ratio which is earnings before interest and taxes / interest. The times interest earned ratio for Wal-Mart is $18,435,000 / $1,900,000 = 9.7. This looks good for Wal-Mart because a times interest earned ratio of 3 is decent and 5 is good.
In an effort to determine the real value of Wal-Mart common stock, multiple evaluation
References: Business Dictionary. (2009). Dividend discount model. Retrieved on November 1, 1009 from: http://www.businessdictionary.com/definition/dividend-discount- model.html. Investopedia. (2009). Dividend discount model – DDM. Retrieved on November 1, 2009 from: http://www.investopedia.com/terms/d/ddm.asp. InvestorWords. (2009). Common stock. Retrieved on November 1, 2009 from: http://www.investorwords.com/986/common_stock.html Money Central. (2009). WMT quote. Retrieved on November 1, 2009 from: http://moneycentral.msn.com/detail/stock_quote?Symbol=WMT. Walmart. (2009). 2009 Annual report. Retrieved on November 1, 2009 from: http://walmartstores.com/sites/AnnualReport/2009/. Yahoo! Finance. (2009). WMT: Competitors for Wal-Mart Stores. Retrieved from http://finance.yahoo.com/q/co?s=WMT Yahoo! Finance