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 …show more content…

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3.1.4

The price/earnings multiple approach

P/E multiples are widely used in the investment industry because they are commonly available and easily used for comparative purposes. The formulation is simply P0 = EP S0 ×P/E0 . Using the values previously mentioned for 2011 and an P/E ratio for Walmart of 13.40, the P0 comes out to be: P0 = EP S0 × P/E0 = $4.11 × 13.40 = $55.03

(3.3)

3.2

Based on the analysis, as Sabrina Gupta, what recommendation would be made

Response
Recommendation is to Buy. The Mean of the price for the 4 methods is $72.24. Removing the highest and lowest values and averaging the remaining ones gives $65.65. Due to the recent close price ($53.48) being much lower than these values, it makes sense at this time to buy.

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Exhibit A Required Return CAP M

Figure A.1: Walmart Returns vs S&P500. From this plot, the adjusted beta can be captured for calculating required return.

From the graph, an adjusted beta value of 0.655 can be seen. This is required for the CAPM calculation of expected return for Walmart. This expected return will be used in this case as the investors’ required return. E(ri ) = rf + βi × {rm − rf } = 3.68% + 0.655 × {5.05%} = 7.0%

(A.1)