Valuing Wal-Mart
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 expected growth rate of the dividend.
The standard method can however be rearranged if the company analyzed is consider in “steady state”. A steady state implies that the annual return on equity equals the cost of equity capital providing the rational that the dividend payout ratio is the sole determinant of the dividend growth.
It requires some complexity to determine if a company has reached steady state. To investigate and analyze if Wal-Mart is in steady state, we would employ the following definition: Steady state value = free cash flow / discount rate . After careful consideration we have reached the conclusion that we find it fair and realistic to label Wal-Mart as such. This is further underlined by the maturity and stable performance of the company, which is illustrated in the stable revenue growth (exhibit 1), stable financial market stock data and relative stable dividend distribution (exhibit 3). Further, we are comfortable using the simplified steady state formula given the foreseeable forecasting period as we are only forecasting the stock price a few years in the future and not conduction long-term multiyear forecasting where the underlying assumptions of the model and the competitive landscape can dramatically
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 expected growth rate of the dividend.
The standard method can however be rearranged if the company analyzed is consider in “steady state”. A steady state implies that the annual return on equity equals the cost of equity capital providing the rational that the dividend payout ratio is the sole determinant of the dividend growth.
It requires some complexity to determine if a company has reached steady state. To investigate and analyze if Wal-Mart is in steady state, we would employ the following definition: Steady state value = free cash flow / discount rate . After careful consideration we have reached the conclusion that we find it fair and realistic to label Wal-Mart as such. This is further underlined by the maturity and stable performance of the company, which is illustrated in the stable revenue growth (exhibit 1), stable financial market stock data and relative stable dividend distribution (exhibit 3). Further, we are comfortable using the simplified steady state formula given the foreseeable forecasting period as we are only forecasting the stock price a few years in the future and not conduction long-term multiyear forecasting where the underlying assumptions of the model and the competitive landscape can dramatically