CORPORATE FINANCE CASE ANALYSIS SUBMISSION

“Valuation of Wal-Mart”

A PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS OF THE CORPORATE FINANCE COURSE (FNA002) OF

Term 2 (PGP 2019-21)

Submitted By
ARZOO JAISWAL (1910071)
BARNISHA LEPCHA (1910072)
JAYETA MATREJA (1910081)
KANCHAN KRISHAN (1910084)
LINGALA VAMSI (1910085)
MALAVIKA UMESH (1910086)

Under the guidance

Of
Prof. Kaveri Krishnan

INDIAN INSTITUTE OF MANAGEMENT, VISAKHAPATNAM

 Valuation of Wal Mart

1. DIVIDEND DISCOUNT MODELS: Dividends in Perpetuity

Under the dividend discount model (DDM), the present value of a stock is calculated as shown by the
formula given below: -

P0=D1/(Ke-g)……[Equation 1]

Where, P0 = Current value of a firm’s stock price

D1 = Next year’s expected dividend

Ke = It is the investor’s required rate of return

g = expected perpetual dividend growth rate

As per the case, the discount rate is 7% and the analyst estimated a constant dividend growth of 5%.

Also, D1 = $1.21 per share

Ke = 7% (as per the case)

Therefore, P0 = 1.21/ (0.07-0.05) = 1.21/0.02 = 60.5

P0 = 60.5
Therefore, the present value of the firm’s stock using the dividends in perpetuity method is $60.5.

2. FORECASTED DIVIDENDS FOR THE NEXT SEVERAL YEARS PLUS SALE

OF STOCK IN THE FUTURE

The terminal value approach is used to calculate the value of a project or a business beyond a given
forecast period wherein future cash flows can be estimated. In this method, the dividends are estimated
for a set number of years (in the case of Wal-Mart it is estimated for 5 years), at which point a future
stock price value is calculated and this value is known as the terminal value. In the forecasted dividend
approach, the future stock price represents the present value at that point of all the future dividends
beyond the terminal value.

The formula for computing the present value of stock using the forecasted dividends approach is given
below: -

P0 = D1/(1+Ke)1 + D2/(1+Ke)2 + ……… + Dn/(1+Ke)n + Pn/(1+Ke)n…… [Equation 2]

Also, as per the case it is given that: -

n = 5, we are taking the estimated dividend values for a period of 5 years.

Assumption: -The growth rate of earnings is expected to 10.40% for the next five years and hence the
dividends are also expected to grow at the same rate (assuming a constant payout ratio).

Discount rate (as per the case) = 7%

The current and future values of dividends are calculated as shown below: -

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 Valuation of Wal Mart

Year Dividend in $
2010 1.090
2011 1.203
2012 1.328
2013 1.466
2014 1.619
2015 1.787
2016 1.876 (grows at a constant
rate of 5% hereon)

Calculation of the terminal value: -

Dividend obtained for the 6th year = 1.876

Hence, terminal value (future stock price) = 1.876/ (0.07-0.05)

Terminal Value (future stock price) = $93.8

Therefore, the current price of stock (obtained by substituting the calculated values in equation 2) =
1.203/(1.07)1 + 1.328/(1.07)2 + 1.466/(1.07)3 + 1.619/(1.07)4 + (1.787)/(1.07)5 +
(93.8)/(1.07)4 = 77.547

Current Price of Stock = $77.547

Therefore, the present value of the firm’s stock using the forecasted dividends method is $77.547.

3. USING THE THREE STAGE APPROACH

As per the guidelines given in the case, this approach can be modelled as given below: -

Discount Rate: r = 7%

For the growth period (g1):

Growth Years: 5

Initial growth rate of EPS: 10.40%

For the maturity period (g2):

Payout at maturity:45%

Retention rate at maturity (retent): 1- (payout ratio): 1-0.45 = 0.55 = 55%

Growth rate at maturity: r x retent: 0.07 *55 = 3.85%

For the transition period:

Transition years: 12

Growth rate of EPS (incremental): The growth rate during the transition period is assumed to be such
that it tends towards the growth rate at the time of maturity. Thus, the growth rate during the transition
period can be calculated as given below:

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 Valuation of Wal Mart

Growth rate during the transition period = (10.4-3.85)/13 = 0.5

This implies that there is a 0.5% drop in the growth rate during the transition period.

Other information:

Current fiscal year EPS (incremental): $3.72

Current calendar year dividend: $1.09

Current payout (p1): 29.3%

Growth years payout = Current year’s payout: 29.3%

Maturity Payout (p2): 45%

Transition years payout = 1.21% = (45-29.3)/13 (Assumption is that payout ratio during the transition
period increases to reach the payout rate at maturity)

Growth + Transition years = 17

Terminal Value (TV) = div1/(r-g)

Year Assumption EPS Growth Dividend payout Present

Number Value
PV(div+TV)
1 Growth 4.11 10.40% 1.20 29.30% 1.12459424
2 Growth 4.53 10.40% 1.33 29.30% 1.16032901
3 Growth 5.01 10.40% 1.47 29.30% 1.19719928
4 Growth 5.53 10.40% 1.62 29.30% 1.23524113
5 Growth 6.10 10.40% 1.79 29.30% 1.27449178
6 Transition 6.70 9.90% 2.05 30.51% 1.36294237
7 Transition 7.33 9.39% 2.33 31.72% 1.44857546
8 Transition 7.99 8.89% 2.63 32.92% 1.53027556
9 Transition 8.66 8.38% 2.95 34.13% 1.60693816
10 Transition 9.34 7.88% 3.30 35.34% 1.67749403
11 Transition 10.03 7.38% 3.66 36.55% 1.74093357
12 Transition 10.72 6.87% 4.05 37.75% 1.79633056
13 Transition 11.40 6.37% 4.44 38.96% 1.84286446
14 Transition 12.07 5.87% 4.85 40.17% 1.87984056
15 Transition 12.71 5.36% 5.26 41.38% 1.90670725
16 Transition 13.33 4.86% 5.68 42.58% 1.92306991
17 Transition 13.91 4.35% 6.09 43.79% 67.2681527
18 Maturity 14.45 3.85% 6.50 45%

Assumptions and Calculations: For maturity period, there is perpetual growth rate of 3.85% and on
the 18th year dividend is 6.5,

Thus P17 = 6.5/ (0.07-0.0385)

= 206.40

Thus, Present value of 17th year dividend and stock price = (6.09+206.4)/1.0717 = 67.268

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 Valuation of Wal Mart

Current price of stock, P0 = Sum of all the present values in the table = 91.98

Therefore, the present value of the firm’s stock using the three-step approach method is $91.98.

4. THE PRICE/EARNINGS MULTIPLE APPROACH

In the method, the intrinsic value of the stock is estimated as the projected EPS (earnings per share)
multiplied by an appropriate forward-looking P/E multiple.

As per the case facts: -

Current value of EPS (as of 2010) = $3.72

EPS growth rate (anticipated earnings growth over the next five years) = 10.40%

Therefore, Projected EPS value = $3.72*1.1040 = $4.10688

P/E multiple (as given in exhibit 7 of the case) = 13.40

Therefore, Present Value of Stock, PV = 4.10688*13.40

PV = $55.032192

Therefore, the present value of the firm’s stock using the price/earnings multiple approach method is
$55.032192.

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