In Problem 10.16, we projected financial statements for Wal-Mart Stores, Inc. (Walmart) for Years +1 through +5. The data in Exhibits 12.16–12.18 include the actual amounts for 2008 and the projected amounts for Year +1 to Year +5 for the income statements, balance sheets, and statements of cash flows for Walmart (in millions).

The market equity beta for Walmart at the end of Year 4 was 0.80. Assume that the risk-free interest rate was 3.5 percent and the market risk premium was 5.0 percent. Walmart had 3,925 million shares outstanding at the end of 2008. At the end of 2008, Walmart’s share price was $46.06.

Required

Sensitivity Analysis and Recommendation

a. 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 percent, not 3 percent 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 Part a. Scenario 2: Assume that Walmart’s longrun growth will be 4 percent, not 3 percent 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 Part 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 Part f.

b. Using these data at the end of Year 4, 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?