Please read the assigned case and then solve the following questions below:
Question 1) Estimate the value of Walmarts stock. In order to do this, utilize the following techniques:
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
CAPM or Cost of Equity is 7.01%
Question 2) What are the main risks associated with the price estimates derived from the DDM methodologies and from the P/E multiple methodology? (2 pages double space)
3. Would you rate Walmart as a buy, sell or hold at that time for an investor with a three-year investment horizon? (1 page double space with reasoning and recommendation)
Additional Notes from The Professor
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. Use the techniques listed on the following slide to do this analysis
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 where you have a multi-stage growth DDM. In the case, the “Terminal Value” is calculated using the “Pt” part of the equation we discussed. That is, its 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.
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