Valuing Walmart
Valuing
Introduction
Currently Wal-Mart serves customers and members more than 200 million times per week. Wal-Mart operates under 69 different banners in 27 countries. With fiscal year 2012 sales of approximately $444 billion, Wal-Mart employs 2.2 million associates worldwide. In 2005 for this case the sales were approximately $285 billion and operated 4,000 stores worldwide.
Valuations
Dividend Discount Method (DDM): The DDM is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued.
This model is appropriate to Wal-Mart as it has been paying a dividend continuously since March 1974.If we use the 3 stage valuation model at the Growth phase we use a rate of 10%, during the transition period we use a rate of 0.65%. Assuming a dividend payout percentage of 45% at maturity I calculate its present value per share to be $50.62 which is a little higher than what it’s trading at present ($49.47).
Capital Asset Pricing Model (CAPM): The CAPM is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.
The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).
For Wal-Mart the CAPM calculation is below:
Assumptions
Rate of return on LT Treasury Composite 2.32%
Introduction
Currently Wal-Mart serves customers and members more than 200 million times per week. Wal-Mart operates under 69 different banners in 27 countries. With fiscal year 2012 sales of approximately $444 billion, Wal-Mart employs 2.2 million associates worldwide. In 2005 for this case the sales were approximately $285 billion and operated 4,000 stores worldwide.
Valuations
Dividend Discount Method (DDM): The DDM is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued.
This model is appropriate to Wal-Mart as it has been paying a dividend continuously since March 1974.If we use the 3 stage valuation model at the Growth phase we use a rate of 10%, during the transition period we use a rate of 0.65%. Assuming a dividend payout percentage of 45% at maturity I calculate its present value per share to be $50.62 which is a little higher than what it’s trading at present ($49.47).
Capital Asset Pricing Model (CAPM): The CAPM is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.
The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).
For Wal-Mart the CAPM calculation is below:
Assumptions
Rate of return on LT Treasury Composite 2.32%