Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data for Walmart

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Problem 10.16 projected financial statements for Walmart for Years +1 through +5. The following data for Walmart include the actual amounts for 2012 and the projected amounts for Years þ+ through +5 for comprehensive income and common shareholders' equity, assuming it will use implied dividends as the financial flexible account to balance the balance sheet (amounts in millions).

Problem 10.16 projected financial statements for Walmart for Years +1

Assume that the market equity beta for Walmart at the end of 2012 was 1.00. Assume that the risk-free interest rate was 3.0% and the market risk premium was 6.0%. Also assume that Walmart had 3,314 million shares outstanding at the end of 2012, and share price was $69.09.
REQUIRED
a. Use the CAPM to compute the required rate of return on common equity capital for
Walmart.
b. Compute the weighted-average cost of capital for Walmart as of the start of Year þ1. At the end of 2012, Walmart had $48,222 million in outstanding interest-bearing debt on the balance sheet and no preferred stock. Assume that the balance sheet value of Walmart's debt is approximately equal to the market value of the debt. Assume that at the start of Year þ1, it will incur interest expense of 4.2% on debt capital and that its average tax rate will be 32.0%. Walmart also had $5,395 million in equity capital from noncontrolling interests. Assume that this equity capital carries a 15.0% required rate of return. (For our forecasts, we assume noncontrolling interests are similar to preferred shares and receive dividends equal to the required rate of return each year.)
c. Use the clean surplus accounting approach to derive the projected dividends for common shareholders for Years þ1 through þ5 based on the projected comprehensive income and shareholders' equity amounts. (Throughout this problem, you can ignore dividends to noncontrolling interests.)
d. Use the clean surplus accounting approach to project the continuing dividend to common shareholders in Year þ6. Assume that the steady-state long-run growth rate will be 3% in Years þ6 and beyond.
e. Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of dividends to common shareholders for Walmart for Years +1 through +5.
f. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement d, compute the continuing value of Walmart as of the beginning of Year +6 based on its continuing dividends in Years +6 and beyond. After computing continuing value, bring continuing value back to present value at the start of Year +1.
g. Compute the value of a share of Walmart common stock, as follows:
(1) Compute the sum of the present value of dividends including the present value of continuing value.
(2) Adjust the sum of the present value using the midyear discounting adjustment factor.
(3) Compute the per-share value estimate.
h. Using the same set of forecast assumptions as before, recompute the value of Walmart shares under two alternative scenarios. To quantify the sensitivity of your share value estimate for Walmart to these variations in growth and discount rates, compare (in percentage terms) your value estimates under these two scenarios with your value estimate from Requirement g. • Scenario 1: Assume that Walmart's long-run growth will be 2%, not 3% as before, and assume that its required rate of return on equity is 1 percentage point higher than the rate you computed using the CAPM in Requirement a. • Scenario 2: Assume that Walmart's long-run growth will be 4%, not 3% as before, and assume that its required rate of return on equity is 1 percentage point lower than the rate you computed using the CAPM in Requirement a.
i. What reasonable range of share values would you expect for Walmart common stock?
Where is the current price for Walmart shares relative to this range? What do you recommend?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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