In Problem 10.16, we projected financial statements for Walmart Stores, Inc. (Walmart) for Years +1 through +5. The data in Exhibits 12.17-12.19 (pages 948-950) include the actual amounts for 2012 and the projected amounts for Year þ1 to Year þ5 for the income statements, balance sheets, and statements of cash flows for Walmart (in millions). These forecast amounts assume Walmart will use implied dividends as the financial flexible account to balance the balance sheet.
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%. Walmart had 3,314 million shares outstanding at the end of 2012, and a share price of $69.09.
REQUIRED
a. Use the CAPM to compute the required rate of return on common equity capital for Walmart.
b. Beginning with projected net cash flows from operations, derive the projected free cash flows for common equity shareholders for Walmart for Years +1 through +5 based on the projected financial statements. Assume that Walmart uses cash for operating liquidity purposes.
c. Project the continuing free cash flow for common equity shareholders in Year +6. Assume that the steady-state, long-run growth rate will be 3% in Year +6 and beyond. Project that the Year +5 income statement and balance sheet amounts will grow by 3% in Year +6; then derive the projected statement of cash flows for Year +6. Derive the projected free cash flow for common equity shareholders in Year +6 from the projected statement of cash flows for Year +6.

d. Using the required rate of return on common equity from Requirement a as the discount rate, compute the sum of the present value of free cash flows for common equity shareholders for Walmart for Years +1 through +5.
e. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement c, compute the continuing value of Walmart as of the start of Year +6 based on Walmart's continuing free cash flows for common equity shareholders in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value at the start of Year +1.
f. Compute the value of a share of Walmart common stock.
(1) Compute the total sum of the present value of all future free cash flows for equity shareholders (from Requirements d and e).
(2) Adjust the total sum of the present value using the midyear discounting adjustment factor.
(3) Compute the per-share value estimate.
If you worked Problem 11.14 in Chapter 11 and computed Walmart's share value using the dividends valuation approach, compare your value estimate from that problem with the value estimate you obtain here. They should be the same.
g. At the end of 2012, Walmart had $48,222 million in outstanding interest-bearing short-term and long-term 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. During 2012, Walmart's income statement included interest expense of $2,251 million, implying an average interest expense of roughly 4.2%. Assume that at the start of Year +1, Walmart will continue to incur interest expense of 4.2% on debt capital and that Walmart's average tax rate will be 32.0%. In addition, at the end of 2012, Walmart had noncontrolling interests of $5,395 million, with an expected return of 15%. (For our forecasts, we assume noncontrolling interests receive dividends equal to the required rate of return each year.) Compute the weighted-average cost of capital for Walmart as of the start of Year +1.
h. Beginning with projected net cash flows from operations, derive the projected free cash flows for all debt and equity stakeholders for Walmart for Years +1 through +5 based on the projected financial statements.
i. Project the continuing free cash flows for all debt and equity stakeholders in Year þ6. Use the projected financial statements for Year +6 from Requirement c to derive the projected free cash flow for all debt and equity stakeholders in Year +6.
j. Using the weighted-average cost of capital from Requirement g as a discount rate, compute the sum of the present value of free cash flows for all debt and equity stakeholders for Walmart for Years +1 through +5.
k. Using the weighted-average cost of capital from Requirement g as a discount rate and the long-run growth rate from Requirement c, compute the continuing value of Walmart as of the start of Year +6 based on Walmart's continuing free cash flows for all debt and equity stakeholders in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value as of the start of Year +1.
l. Compute the value of a share of Walmart common stock.
(1) Compute the total value of Walmart's net operating assets using the total sum of the present value of free cash flows for all debt and equity stake holders (from Requirements j and k).
(2) Subtract the value of outstanding debt to obtain the value of equity.
(3) Adjust the present value of equity using the midyear discounting adjustment factor.
(4) Compute the per-share value estimate of Walmart's common equity shares.
Do not be alarmed if your share value estimate from Requirement f is slightly different from your share value estimate from Requirement l. The weighted-average cost of capital computation in Requirement g used the weight of equity based on the market price of Walmart's stock at the end of 2012. The share value estimates from Requirements f and l likely differ from the market price, so the weights used to compute the weighted-average cost of capital are not internally consistent with the estimated share values.
m. Using the free cash flows to common equity shareholders, recompute the value of Walmart shares under two alternative scenarios.
Scenario 1: Assume that Walmart's long-run growth will be 2%, not 3% as before, and assume that Walmart's 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 Walmart's required rate of return on equity is 1 percentage point lower than the rate you computed using the CAPM in Requirement a. 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 f.
n. Using these data at the end of 2012, what reasonable range of share values would you have expected for Walmart common stock? At that time, what was the market price for Walmart shares relative to this range? What would you have recommended?

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Exhibit 12.17 Walmart Stores, Inc. Income Statements for 2012 (Actual) and Year +1 through Year +5 (Projected) (amounts in millions; allow for rounding) (Problem 12.17) Actual Projected 2012 Year +1 Year +2 Year +3 Year +4 Year +5 $ 469,162 487,928 $507,446 527,743 548,853 $ 570,807 Revenues Cost of goods sold Gross Profit Selling, general, and (352,488) (365,946) (380,584 (395,808) (411,640) (428,105) 116,674 121,982 126,861 131,936 137,213 142,702 (88,873) (92,706) (96,415) (100,271) 104,282) (108,453) administrative expenses Interest income Interest expense Income before tax Income tax expense Income attributa ble to 202 (2,522) 187 202 202 202 202 (2,251) (7,981) (757) (2,308) (8,694) (809) (2,377) (9,047) (809) (2,448) (9,414) (809) (2,597) (9,796) (10,193) (809) 25,737 27,170 28,272 29,419 30,612 31,853 (809) noncontrolling interests Net Income Attributable to Common Shareholders 16,999 17,666 18,416 19,195 20,007 20,851 Source for Actual 2012: Walmart Stores, Inc, Form 10-K for the Fiscal Year Ended January 31, 2013. Exhibit 12.18 Walmart Stores, Inc. Balance Sheets for 2012 (Actual) and Year +1 through Year +5 (Projected) (amounts in millions; allow for rounding) (Problem 12.17) Actual Projected 2012 Year+1 Year +2 Year +3 Year +4 Year+5 ASSETS Cash and cash equivalents Accounts receivable-net 7,781 7,781 $ 7,781 7,781 $7,781 7,781 8,638 43,803 44,114 45,879 47,714 49,622 51,607 6,768 7,106 7,462 7,835 8,227 Prepaid expenses and other 1,718 1,588 59,940 60,653 62839 65,116 67488 69,958 1,652 1,786 1858 current assets Current Assets Property, plant & equipment- 71,724 184,224 196,724 209,224 221,724 234,224 (55,043) (64,254) 74,090) (84,552) (95,638) (107,349) 26484 27.54328645_29,7913098332222 at cost Accumulated depreciation Goodwill and other assets Total Assets $203,105 $208,166 $214,118 $219,579 $224,556 $ 229,055 LIABILITIES Accounts payable-trade Current accrued expenses Notes payable and short-term debt 6,805 7,009 7,219 7436 7,659 Current maturities of long-term $38,080 38,131 39,806 41,398 43054 $ 44,777 18,808 19,560 20,343 21,156 22,003 22883 7,889 6,091 ,277 2346 5,914 6,462 2,416 debt 6,274 6,656 6856 Income taxes payable 2488 Current Liabilities Long-term debt Deferred tax liabilities-noncurrent 7613 Redeemable noncontrolling $ 71818 73,069 75,988 78,869 81,861 $ 84,967 48,014 8,826 41417 42,660 43,939 45,257 46,615 8,077 8,319 8,568 interest Total Liabilities $121,367 $123,570 $128,004 $132,446$137,045 $ 141,807 SHAREHOLDERS EQUITY Common stock + paid-in capital Retained eanings Accum. other comprehensive 3,952 4,163 4,282 4,392 4491 4,581 72978 75,625 77,023 77,934 78,213 77,859 (587)53 5,395 income (loss) (587) (587) (587) Common Shareholders' Equity 76343 $ 79,201 80,719 81,738 $ 82117 81,853 Noncontrolling interests 5,395 81,738 5,395 84,596 86,114 87,133 87,512 5,395 5,395 Total Equity 87,248 Total Liabilities and Equities $203,105 $208,166 $214,118 $219,579 $224,556 229,05!5 Source for Actual 2012 Walmat Stores, Inc, Form 10-K for the Fiscal Year Ended January 31, 2013 Exhibit 12.19 Walmart Stores, Inc. Projected Implied Statements of Cash Flows for Year +1 through Year +5 (amounts in millions; allow for rounding) (Problem 12.17) Projected Year +1 Year +5 ear IMPLIED STATEMENTS OF CASH FLOWS Net income Add back depreciation expense (net) (Increase) Decrease in receivables-net (Increase) Decrease in inventories (Increase) Decrease in prepaid expenses Increase (Decrease) in accounts payable-trade Increase (Decrease) in current accrued liabilities Increase (Decrease) in income taxes payable Net change in deferred tax assets and liabilities $18,476 $19,225 9,836 (355) (1,765) $ 20,005 10,461 (373) $ 20,816 11,086 $21,660 11,711 (411) (1,985) (338) (1,909) 1,592 1,656 1,722 4 Net Cash Flows from Operations $28,072 $29,636 $30,908 $32,355 (12,500) (269) $33,835 (Increase) Decrease in prop, plant, & equip, at cost (Increase) Decrease in goodwill and nonamort. intang. (Increase) Decrease in other noncurrent assets (12,500) (959) (280) $(13,559) $(13,602) $(13,646) $(13,692) (13,739) (12,500) (820) (239) (12,500) (853) (12,500) (887) (259) Net Cash Flows from Investing Activities Increase (Decrease) in short-term debt Increase (Decrease) in long-term debt Increase (Decrease) in redeemable noncontrolling interest Increase (Decrease) in common stock +paid-in capital Increase (Decrease) in accumulated OCI 1,358 1,398 2 (15,020) (809) (17,017) (809) (18,285) (19,728) (809) (21,204) (809) Increase (Decrease) in noncontrolling interests (809) Net Cash Flows from Financing Activities Net Change in Cash $(14,513) (16,035) (17,262) (18,663) (20,096)