Case Report One: Walmart
1. Estimate the value of Walmart’s stock (i.e., your best guess of what price their stock should be trading at), as of February 2010. Your estimate should be based solely on the numbers provided in the case, and using the techniques discussed in the case, which have also been discussed in class and in the text. The case briefly touches upon the Capital Asset Pricing Model (“CAPM”) as a means to derive the Cost of Equity Capital (discount rate). As we haven’t yet covered the CAPM in the course, you may use a discount rate of 7.01% for the relevant analysis.
2. Please note that what the case refers to on Page 3 as the “Use of Dividends and a Terminal Value” is the same as what we discussed in class on slide 35 where you have a multi-stage growth DDM. In the case, the “Terminal Value” is calculated using the “Pt” part of the equation on slide 35. That is, it’s the expected Price of the stock at a year in the future (the “terminal year”) where from that point on the dividend is growing at a constant rate forever into the future. One must then discount this back to “today.” For your reference, this is discussed in the textbook on pages 260 – 262
Case Report One: Walmart Continued
3. In terms of stock price valuation methodologies, could you kindly do:
• a Constant Growth Dividend Discount Model analysis
(referred to as “Dividends in Perpetuity” in the case);
• a two stage Dividend Discount Model (i.e. a faster dividend growth rate over the next five years followed by a slower growth rate forever) and
• a P/E multiple analysis
• For those who would like to attempt the “Three Stage
Approach” bonus points will be awarded but this isn’t required
4. What are the main risks associated with the price estimates derived from the DDM methodologies and from the P/E multiple methodology?
5. Would you rate Walmart as a buy, sell or hold at that time for an investor with a three-year investment horizon?
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]